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Market Wire:
US Consumer Spending Slows, Lowering Growth Projections

Karl Schamotta September 27, 2019

U.S. consumer spending weakened and inflation cooled in August, suggesting that consumer spirits were dampened by the negative economic narratives that dominated headlines during the month – while supporting the case for more monetary easing from the Federal Reserve.

Numbers released this morning by the Bureau of Economic Analysis show that household spending increased 0.1% in August, with a drop in spending at restaurants and hotels offsetting purchases of recreational goods and vehicles to drag the headline number below consensus estimates that had been set at 0.3%. In July, household consumption rose a revised 0.5%.

Personal income rose 0.4% and wages increased 0.6%. With income growth outpacing spending, the savings rate rose to 8.1% from 7.8% in the prior month.

Consumer prices as measured by the personal consumption expenditures index were unchanged in August after posting a 0.2% increase in July.

With food and energy components removed, the Federal Reserve’s preferred inflation gauge rose 0.1% in the month – up 1.8% on a year-over-year basis. This further narrows the gap against the central bank’s 2% target, but is consistent with late-cycle economic dynamics – inflation often rises modestly even as the overall economy slows.

Orders for durable goods – products designed to last for more than three years – rose 0.2% from a month earlier, and a separate report showed orders for non-military capital goods excluding aircraft fell -0.2%.

These data should weaken expectations for third-quarter gross domestic product, with a slowdown in consumer consumption coupling with persistent weakness in business investment and manufacturing to impact overall growth rates. With the effects of the 2017 fiscal stimulus fading, tariff rates rising, and negative economic news migrating from Wall Street to Main Street, the outlook for the world’s largest economy – and consumer of last resort – is darkening.

With yields under pressure, the US dollar weakened slightly but looks set to close out the week near a multi-week high against its major counterparts. With trade uncertainties pummeling exporter currencies, global growth slowing, and political machinations triggering repeated flights to safety, the dollar is winning the “reverse beauty contest” that so often characterizes currency markets. But uneasy lies the head that wears the crown…

Karl Schamotta
Chief Market Strategist

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