The economic foundation of the United States remains robust.
In August, there was a modest 0.1% increase in U.S. retail spending compared to the previous month, according to a report from the Commerce Department released on Tuesday. Although this increase is slower than the revised 1.1% rise in July, it significantly exceeds the 0.2% decrease forecasted by economists in a FactSet survey. These statistics have been adjusted for seasonal variations but not for inflation.
This is a positive indicator for the American economy, which relies on consumer spending for two-thirds of its economic output, with retail sales accounting for a significant portion of this spending.
The report released on Tuesday is particularly important as it is the last major economic update before the Federal Reserve’s announcement of its next interest rate decision on Wednesday. The data seems to have minimal impact on the anticipated rate reduction. There is ongoing debate about whether the Fed will implement a modest quarter-point reduction or a more substantial half-point cut.
The condition of the U.S. economy, particularly the job market, remains a critical concern for both the Fed and Wall Street. The latter is anticipating that the central bank will begin significant rate cuts. The job market has tightened recently, with fewer employment opportunities available, making it challenging for individuals to secure new positions. Over the past year, the unemployment rate has increased sharply, climbing to 4.2% last month from 3.8% the previous year.
A weakening job market could lead to a significant decrease in consumer spending, potentially destabilizing the U.S. economy. This scenario would compel businesses to reconsider their employment strategies, leading to reduced spending by American consumers and potentially triggering a downward economic spiral. In such cases, the Fed might intervene by lowering borrowing costs to prevent further economic decline.
U.S. consumers are approaching spending with caution
Despite consumer spending being higher than before the pandemic, two recent surveys indicate a potential decline in future months.
According to a survey conducted by the Federal Reserve Bank of New York in August, respondents reported a 5% yearly increase in nominal household spending, an increase from 4.6% in April.
However, the median expected monthly spending growth rate slightly decreased to 3% last month, as per the New York Fed survey. This rate is significantly lower than the peak of 5.4% in April 2022 but still higher than the levels observed in 2019.
A similar trend was observed in a separate survey by Bank of America released on Friday, which showed a reduction in spending expectations from May 2024 across both three- and twelve-month projections.
Robert F. Ohmes, a research analyst at Bank of America Securities, noted that consumers are becoming increasingly selective about their spending, attributing this trend to a shift in budget allocation rather than concerns about unemployment. He highlighted the example of food prices, which have increased significantly compared to their stability before the pandemic.
As of August, food price inflation has shown signs of stabilization, with grocery prices increasing at an annual rate of 0.9%, aligning with the average rise observed in 2019, according to data from the Bureau of Labor Statistics.
