In August, Americans increased their expenditures; nonetheless, the cost of living escalated as food and various goods saw further price hikes, while service costs persisted at elevated levels. Recent economic data indicated that consumer spending increased by 0.6% during the crucial back-to-school shopping month of August, and by 0.4% when accounting for inflation. This serves as additional evidence that a key component of the US economy remains resilient, even amidst widespread uncertainty and a deceleration in the labor market. Nonetheless, that expenditure is progressively being directed towards necessary acquisitions, such as health care, during a period when income increases are failing to keep pace. Simultaneously, certain prices — particularly those subjected to significant tariffs enacted by President Donald Trump — are increasing at a rate not seen in months, as indicated by data from the Commerce Department released on Friday.
“Not all households are weathering the tariff storm equally,” Greg Daco wrote in a note, adding that aggregate consumer spending “gives the appearance of broad-based consumer resilience, but a silent majority is increasingly feeling the strain of higher grocery, furniture, auto, and services prices.” The Personal Consumption Expenditures price index, which serves as the inflation measure for the Federal Reserve’s 2% target rate, experienced a monthly increase of 0.3% (compared to a 0.2% rise in July). This change elevated the annual rate to 2.7%, up from 2.6%, marking a six-month peak. In August, there was a notable increase in energy and gas prices, which significantly contributed to the monthly rise; concurrently, food prices also experienced a substantial uptick. The increase was 0.5%, marking the highest monthly gain since March, and reflects a 2.2% rise compared to the previous year. When excluding food and energy, which are often subject to significant fluctuations, a key indicator of core inflation remained unchanged in August. The core PCE price index increased by 0.2% in August, maintaining the same rate as in July, and remained steady at 2.9%. Friday’s data indicated that inflation continues to exceed the Fed’s 2% target significantly. “Inflation dynamics inside the August PCE report illustrated stubborn service sector inflation that increased from 3.5% to 3.6%, while one can clearly observe rising good prices inside the index with a year ago increase of 13.9% in beef and veal costs along with a 7% increase in household utility costs as well as a 6.2% increase in the cost of electricity all on a year ago basis,” Joe Brusuelas.
Inflation was anticipated by economists to increase by 0.3% from July, leading to an annual rise of 2.7%. Equities experienced an upward movement in response to the news. The Dow experienced an increase of 200 points, representing a rise of 0.44%. The S&P 500 experienced an increase of 0.2%, while the Nasdaq Composite saw a modest rise of 0.03%. In August, it seems that Americans engaged in a spending spree, utilizing their savings in the process. Friday’s report indicated a decline in the saving rate, which fell to 4.6% from 4.8% in July. Spending gains outstripped income growth for the month. Personal income increased by 0.4%, but only 0.1% when adjusted for inflation. According to data, inflation-adjusted (or “real”) after-tax personal income is experiencing a growth of 1.9%, whereas real spending has increased by 2.7%. In September 2019, prior to the onset of Covid, real disposable income exhibited a growth rate of 3%. Nonetheless, while the overall spending trajectory seems robust, the US economy is increasingly driven by a select few. During the second quarter of this year, data indicates that the top 20% of earners represented approximately half of total spending. “While we are encouraged by the 0.4% increase in income growth, the fact that Americans had to draw down savings to support the current pace of spending serves as a reminder that this spending trend is likely driven by upper-end households, while lower-income cohorts continue to experience stress,” Brusuelas wrote. The most recent sentiment data from the University of Michigan, released on Friday, indicated that Americans’ perceptions of the economy continue to hover close to a historic low. “You have to go back to the Great Recession to see economic vibes this bad,” stated Elizabeth Renter. “This month, it is noteworthy that the decline in sentiment has been observed across various demographics — individuals from most backgrounds are expressing a more pessimistic outlook on both the current and future economy.”
“Wealth offers a degree of protection against perceived economic fluctuations, and investors have generally been faring well,” she noted. This “K-shaped” environment, experts caution, renders the US economy progressively susceptible to shocks. A further potential concern for the economy is the persistent alteration in the structure of consumer expenditure. Recent months’ data and company earnings reports indicate that Americans are allocating a growing portion of their expenditures to essential sectors — notably health care, housing, and insurance — while reducing spending in other areas, according to Adam Josephson, a seasoned analyst in the paper and packaging industry who provides insights through a newsletter focused on consumer spending and broader economic trends. As of August, expenditures on health care represented almost 23% of total consumer spending. Nearly fifty percent of health care expenditures are derived from the Medicare and Medicaid sectors, he noted. “As a greater portion of individuals’ finances is allocated to essential expenditures, the diminished funds available for discretionary spending become evident,” he stated in an interview. When discretionary spending declines, it may indicate potential challenges for the overall economy.
“You’ve observed it over the past year across various consumer sectors, including consumer packaged goods, retail, dining, airlines, and hospitality. Any enterprise that offers products or services deemed discretionary appears to be encountering difficulties,” he stated. “If these companies that cater to the consumer economy are facing increasing challenges, what actions are they likely to take?” They are expected to reduce operations, implement cost-cutting measures, which will likely result in layoffs and facility closures. Josephson highlighted Starbucks as a quintessential case study. The largest coffee chain in the nation revealed on Thursday its intention to shutter 400 underperforming locations across the country. While the closures represent only a fraction of Starbucks’ overall footprint, the cost-reduction measures entail the termination of approximately 900 employees.