US consumer spending grew more than expected in August, but a fall in July data kept hopes that economic growth slowed in the third quarter as a resurgence in COVID-19 infections curbed demand for services.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, declined 0.8% in August, the Commerce Department said on Friday, offset by a decline in automotive sales due to a global shortage of semiconductors. Which is reducing the production of automobiles.
As previously reported, data for July was revised to reflect a 0.1% decline in spending instead of a 0.3% increase. Economists polled by Reuters had forecast a 0.6% increase in consumer spending in August. Back-to-school purchases and child tax credit payments from the government were likely to increase spending.
While spending is shifting back from goods to services, a flare-up in coronavirus cases in the summer, driven by Delta Edition, has dampened demand for air travel and hotel accommodation as well as sales at restaurants and bars.
Services account for the bulk of consumer spending. Consumer spending growth is expected to decelerate sharply in the third quarter and gain steam for the rest of the year. Infections are declining, which is already driving demand for travel and other high-contact services.
Consumer spending strengthened at a compound annual rate of 12.0% in the second quarter, accounting for the economy’s 6.7% growth momentum, which lifted GDP levels above their peak in the fourth quarter of 2019. Growth projections for the third quarter are below 5.0%.
“Consumer momentum should improve over the coming months, taking the economy closer to a full recovery from the pandemic and keeping inflation warm,” said David Kelly, chief global strategist at JPMorgan Funds in New York.
Inflation maintained its upward trend in August. The personal consumption expenditure (PCE) price index, excluding volatile food and energy components, climbed 0.3% after rising by a similar margin in July.
In the 12 months through August, the so-called core PCE price index rose 3.6%, matching July’s gains.
The Core PCE Price Index is the Federal Reserve’s preferred inflation measure for its flexible 2% target. The Fed last week raised its main PCE inflation forecast for this year to 3.7% from 3.0% in June.
The US central bank said it would begin reducing its monthly bond purchases as soon as November and indicated interest rate hikes could happen faster than expected. Fed Chairman Jerome Powell told lawmakers on Thursday that he expects some relief from high inflation in the coming months.