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US consumer spending saw almost flat activity in August, an indicator that the driving force behind the US economy is slowing down following strong growth in Q2 2019. Core-PCE, the preferred measure of inflation, came in at 1.8% as expected. A report released by the Commerce Department on Friday shows just 0.1% growth in personal spending last month vs. 0.3% expected.

Key Takeaways

• Consumer spending rose 0.1% in August after rising 0.5% in July, revised downward from 0.6%
• Last month’s consumer spending was 0.2% below market expectations, although core-PCE was in line with forecasts at 1.8%.
• Consumer spending accounts for the bulk of US economy activity, meaning that a major slowdown could spell trouble for other areas of the economy.

Consumer spending, which accounts for two-thirds of US economic activity, has slowed down in August to 0.1% growth vs. 0.3% expected. Last month’s activity was revised downward from 0.6% to 0.5%, indicating a cooldown in the powerhouse of the US economy. An increase in spending on recreational goods and motor vehicles was offset by a reduction in spending at restaurants and hotels in August.

Consumer prices measured by the personal consumption expenditures (PCE) price index saw no change in August, with the third consecutive month of decline in the price of food and a 2% drop in the cost of energy goods and services. The PCE index rose 0.2% in July, and 1.4% in the 12 months through August. Excluding the volatile components of energy and food, the PCE price index rose just 0.1% last month, bringing the annual core-PCE price index to 1.8%, the largest gain since January.

When adjusted for inflation, consumer spending underwent a 0.1% rise in August and 0.3% in July. Consumer spending rose 4.6% annually in Q2, the fastest pace in over four year.

Last month, spending on goods rose 0.1%, largely driven by spending on recreational goods and motor vehicles, while spending on services rose 0.2%. Personal income rose 0.4% in August after a smaller 0.1% gain the month before, while wages increased 0.6%. As income growth outpaced spending, savings in the US rose from $1.29 trillion to $1.35 trillion.

Monetary Policy

Core-PCE is used by the Federal Reserve to measure inflation, and that measure has fallen short of the central bank’s target range of 2% for this year.

The US Federal Reserve cut the benchmark interest rate last week for the second time this year after implementing no rate cuts for a decade. The central bank was motivated by the effects of the trade war on the record-breaking period of economic expansion currently underway in the US, along with the economic slowdown seen worldwide.

The slowdown is a concern to economic analysts, as consumer spending and the strong labor market have largely mitigated the negative effects of tame inflation pressure, an escalating trade war, and recessionary pressures felt worldwide. The trade war, which has been in effect for over a year, has had a serious impact on business investment and the manufacturing industry, although those effects have yet to manifest in layoffs due to the robust labor market.

As tariffs on Chinese goods escalated to include consumer goods, it is now possible that consumer spending will be affected, impacting the broader economy. The labor market could also take a hit as a result of lower business investment and poor activity in various industries, which could also have widespread effects.

Q2 GDP came in at 2% growth, down from 3.1% the previous quarter, due in part to the drag created by the trade war. The Atlanta Fed is now predicting 1.9% growth in Q3, which would mark two consecutive quarters of reduced growth and raise questions of a trending slowdown.

Market Reaction

Gold prices are down in today’s session following the release of the under-target inflation data. Spot gold last traded at $1,492.12/oz, down -1.02% with a high of $1,509.28/oz and a low of $1,487.54/oz. Spot gold has slipped under crucial support at $1,500, despite the possibility of sub-target inflation readings increasing the use case for gold as a hedge against risk, as well as lower than expected durable goods orders for August.