WASHINGTON (Aug 28): U.S. consumer spending rose in July as households stepped up automobile purchases, offering further evidence of strength in the economy that could keep the door open to a Federal Reserve interest rate hike this year.
While other data on Friday showed consumer sentiment dipped in August, likely as households fretted over a recent stock market sell-off, confidence remained at levels consistent with solid consumer spending growth.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3% last month after a similar gain in June.
Spending on long-lasting goods such as automobiles increased 1.1 percent, reversing June's decline. Auto purchases accounted for about half of the increase. When adjusted for inflation, consumer spending rose 0.2% after being flat in June.
"We score this report as a solid adjunct to yesterday's strong GDP report that should encourage members of the Fed's policy making committee that income and spending fundamentals remain in good shape," said John Ryding, chief economist at RDQ Economics in New York.
It was the latest report indicating momentum in the economy as it confronted recent global financial markets turbulence, sparked by concerns over a slowing Chinese economy, which has diminished the chances of an interest rate increase next month.
New York Fed President William Dudley said this week that prospects of a September lift-off in the central bank's short-term interest rate "seems less compelling to me than it was a few weeks ago."
But St. Louis Fed President James Bullard told Reuters on Friday that the stock market rout should not delay the first rate hike since 2006.
"Nothing has happened here that is so radically changing the U.S. outlook that the basic trajectory of policy would change," Bullard said on the sidelines of a global central bankers' conference in Jackson Hole, Wyoming.
Inflation still muted
Economists say that underlying strength, also highlighted by a rebound in business spending, buoyant housing and labor markets, gives the economy muscle to weather the fallout from the markets rout. The economy grew at a 3.7% annual rate in the second quarter.
Muted inflation, however, suggested the U.S. central bank was unlikely to hike rates next month even if financial markets settled down before the Sept 16-17 policy meeting.
The personal consumption expenditures (PCE) index, excluding food and energy rose 1.2% in the 12 months through July, the smallest rise since March 2011. This so-called core PCE price index is the Fed's preferred inflation measure. It increased 1.3% in June and is running below the Fed's 2% target.
Prices for longer-dated U.S. Treasury debt rose, while stocks on Wall Street fell after two days of hefty gains. The dollar rose against a basket of currencies.
In a separate report, the University of Michigan said its consumer sentiment index fell to 91.9 this month from a reading of 93.1 in July. Still, the index remained at levels consistent with a 2.9% growth pace in consumer spending this year.
The survey showed a mild decline in buying intentions for durable goods and an increase in home purchase expectations.
"We continue to see relatively stable buying intentions as a positive for consumer spending activity in the months to come. And as the global equity markets have rebounded, we expect consumer confidence to pick up over the next few months," said Cheng Chen, an economist at TD Securities in New York.
Consumer spending should be supported by steady income growth and higher savings. Last month, personal income increased 0.4% in July as wages and salaries recorded their largest rise since November 2014.
Income has risen by the same margin for four straight months. Savings increased to a $651.1 billion annual rate from $627.3 billion in June.
"The economy has built up a huge amount of steam to push it forward in the months to come with the substantial cash reserves that consumers are holding," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.