Consumer Spending Growth Slows, Sentiment Takes a Plunge

A shopper at a Walmart store in Bradford, Penn., on July 20, 2020. (Brendan McDermid/File Photo/Reuters)

New government data shows U.S. consumer spending in July grew by a lackluster 0.3 percent, a far slower pace than the 1.1 percent pace of growth in the prior month and a sign that the economic recovery may be losing steam in the third quarter as the Delta variant spreads.

The Commerce Department said in a release Friday that consumer spending, which accounts for around two-thirds of U.S. economic growth, rose $42.2 billion in July, or a modest 0.3 percent over the month. A separate sentiment gauge from the University of Michigan showed American consumer confidence fell sharply in August.

Still, the foundation for the economic recovery appears solid, with the Commerce Department report showing wages rising and a boost in savings, giving American consumers more spending potential to unlock going forward, even as the rise in infections clouds the outlook.

“There are clear downside risks to spending if more events and trips are canceled and more products are delayed getting to shelves,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, in remarks to Reuters. “But it’s a bit early to throw in the towel on the economic outlook given supportive wage and saving trends and a likely boost from business investment, inventories, and trade in the third quarter.”

Besides the resurgence of the pandemic, another cloud on the recovery horizon is a sharp drop in consumer sentiment. The University of Michigan’s consumer sentiment index fell to 70.3 in August, the lowest level since 2011.

“Consumers’ extreme reactions were due to the surging Delta variant, higher inflation, slower wage growth, and smaller declines in unemployment,” Richard Curtin, the survey director, said in a statement. “The extraordinary falloff in sentiment also reflects an emotional response, from dashed hopes that the pandemic would soon end and lives could return to normal.”

Along with the dip in spending and the plunge in sentiment, inflationary pressures eased a bit in July. The core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge for calibrating monetary policy, rose by 0.3 percent in July, after rising 0.5 percent in June and 0.6 percent in May, suggesting inflation may have peaked and will now begin to soften—a view held by Federal Reserve officials.

Fed chair Jerome Powell said in a speech Friday that, while there’s been a “sharp run-up” in inflation, there are signs that it’s moderating.

“Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary,” he said, arguing that the current spike in inflation is largely driven by a relatively narrow group of goods and services that have been directly impacted by the pandemic and the reopening of the economy, effects that “should wash out over time.”

Powell also made a case for the persistence in disinflationary forces like technology and globalization, arguing that there is little evidence these have suddenly reversed or abated, saying that “it seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”

The Fed’s baseline economic outlook is for the economy to continue progressing toward maximum employment, with inflation returning closer to the Fed’s goal of averaging 2 percent over time, Powell said.

While the spread of the Delta variant has led economists to trim their forecasts for growth in the current quarter, analysts still believe if COVID-19 cases fall in the final months of 2021, the country will experience its strongest growth this year in decades.