U.S. consumer spending increased slightly less than expected in August, suggesting some moderation in economic growth in the third quarter, while the annual rise in prices was the smallest in just over 3-1/2 years.
A solid pace of economic growth this quarter, however, remains in the cards as other data from the Commerce Department on Friday showed the goods trade deficit narrowed by the most in nearly two years last month.
Economists did not see the spending and inflation data as weak enough to compel the Federal Reserve to deliver another 50 basis points interest rate cut in November as hoped by investors.
"All things considered, this month's report does not nudge the Fed in the direction of another forceful 50 basis points cut in November," said Olu Sonola, head of U.S. economic research at Fitch Ratings. "Two 25 basis points cuts still seem more likely in November and December."
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month after an unrevised 0.5% gain in July, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast consumer spending climbing 0.3%.
Spending was concentrated in services, with outlays on housing as well as financial services and insurance topping the list. There were also increases in spending on healthcare, transportation and recreation services.
Consumers also boosted spending at bars and restaurants and stayed at hotels and motels. Goods spending was, however, weighed down by a decline in motor vehicles and parts purchases. Receipts at service stations also dropped amid cheaper gasoline.
But outlays on other nondurable goods rose as did those on recreational goods and vehicles.
Consumer spending continues to be supported by still-solid wage gains even as the labor market has slowed considerably.
Annual revisions to national accounts data published on Thursday showed stronger wages and salaries growth in the second quarter than had been previously estimated. The saving rate also was higher than previously thought. Higher incomes and savings bode well for consumer spending for the rest of the year.
There had been worries that consumers were drawing down savings to fund spending. Labor market jitters, with the unemployment rate rising above 4%, had raised the specter of precautionary saving, which would undermine spending.
EBBING PRICE PRESSURES
The personal consumption expenditures (PCE) price index rose 0.1% in August after an unrevised 0.2% gain in July. Economists had forecast PCE inflation advancing 0.1%.
Goods prices declined 0.2% after being unchanged in July. The drop was offset by a 0.2% rise in the cost of services, which followed a similar gain in July.
In the 12 months through August, the PCE price index increased 2.2%. That was the smallest year-on-year gain since February 2021 and followed a 2.5% rise in July.
Excluding the volatile food and energy components, the PCE price index increased 0.1% after an unrevised 0.2% rise in July. In the 12 months through August, core inflation advanced 2.7% after climbing 2.6% in July. The U.S. central bank tracks the PCE price measures for its 2% inflation target.
Investors remained hopeful of another hefty rate cut. Financial markets raised the odds of a half-percentage-point rate cut at the U.S. central bank's Nov. 6-7 policy meeting to about 52% from 50% earlier, according to CME's FedWatch tool.
The chances of a 25 basis points rate reduction were lowered to roughly 48% from 50% before the data.
The U.S. central bank last week cut its benchmark overnight interest rate by 50 basis points to the 4.75%-5.00% range, the first reduction in borrowing costs since 2020. The Fed raised its policy rate by 525 basis points in 2022 and 2023.
The dollar fell against a basket of currencies. U.S. Treasury prices rose.
A separate report from the Commerce Department's Census Bureau on Friday showed the goods trade deficit contracted $8.6 billion, or 8.3%, in August to $94.3 billion.
The dollar amount drop was the largest since November 2022. The decline in the deficit reflected a 1.6% fall in imports. Goods exports increased 2.4%. Trade has subtracted from gross domestic product for two straight quarters.
"The sharply lower estimate of the trade deficit for August still puts real GDP in the third quarter on track for a gain of 2.5% to 2.75% on our GDP arithmetic," said Conrad DeQuadros, senior economic advisor at Brean Capital.
Growth estimates for the third quarter are mostly around a 2.9% annualized rate. The economy grew at a 3.0% pace in the April-June quarter.
