Automobiles boost U.S. consumer spending; inflation still tame

August 29, 2016 11:23 AM

U.S. consumer spending increased for a fourth straight month in July amid strong demand for automobiles, pointing to a pickup in economic growth that could pave the way for the Federal Reserve to raise interest rates this year.

The Commerce Department said today that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.3% last month after a 0.5% gain in June.

July's increase was in line with economists' expectations. When adjusted for inflation, consumer spending also rose 0.3% in July after advancing 0.4% in June.

Consumer spending appears to have retained some of its momentum from the second quarter, when it grew at a 4.4% annual rate, the fastest in nearly two years. That jump helped to mitigate some of the impact of a sharp inventory drop and prolonged business investment downturn.

The economy grew at a lackluster 1.1% annual rate in the second quarter.

U.S. stock futures rose after today's data, while prices for U.S. Treasuries held earlier gains. The dollar was trading higher against a basket of currencies. July's consumer spending data added to reports on the goods trade deficit, industrial production, durable goods orders and residential construction that have pointed to an acceleration in economic growth early in the third quarter.

The Atlanta Fed is currently estimating third-quarter GDP growth rising at a 3.4% annual pace. 

Consumer spending is being driven by a tightening labor market, which is steadily lifting wages. Rising home values and stock market prices, which are boosting household wealth, are also supporting consumption. 

Fed Chair Janet Yellen told a gathering of global central bankers on Friday that she believed the case for raising interest rates had been strengthened in recent months by the "solid performance of the labor market and our outlook for economic activity and inflation."

Last month, there was little sign of inflation pressures even as consumer spending firmed. 

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1% after a similar gain in June.

In the 12 months through July the core PCE increased 1.6%. It has risen by the same margin every month since March. The core PCE is the Fed's preferred inflation measure and is running below its 2% target. 

Consumer spending last month was lifted by a 1.6% surge in purchases of long-lasting manufactured goods such as automobiles. Spending on services rose 0.4%, but outlays on non-durable goods slipped 0.5%. 

Personal income increased 0.4% in July after rising 0.3% in June. Wages and salaries advanced 0.5%. Savings rose to $794.7 billion from $776.2 billion in June.

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