Consumer Spending Rises in July; Inflation Muted

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Consumer Spending
David Goldman/AP
By Lucia Mutikani

WASHINGTON -- U.S. consumer spending picked up a bit in July as households bought more automobiles, offering further evidence of strength in the economy that could keep the door open to a Federal Reserve interest rate hike this year.

The Commerce Department said Friday consumer spending increased 0.3 percent after an upwardly revised 0.3 percent rise in June. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have gained 0.2 percent in June.

Economists polled by Reuters had forecast consumer spending rising 0.4 percent last month.

It was the latest report indicating momentum in the economy as it confronted recent global financial markets turbulence, sparked by concerns over a slowing Chinese economy, which has diminished the chances of an interest rate increase next month.

New York Fed President William Dudley said this week that prospects of a September lift-off in the central bank's short-term interest rate "seems less compelling to me than it was a few weeks ago."

Some economists, however, believe the U.S. central bank could still raise interest rates in September if financial markets settle down and the streak of fairly strong data continues.

Economists say that underlying strength, also highlighted by a rebound in business spending, buoyant housing and labor markets, as well as bullish consumer confidence, gives the economy muscle to weather the fallout from the markets rout.

U.S. Treasury debt prices were little changed on the data, while the dollar slipped against the euro and the yen. U.S. stock index futures pared losses.

The fairly upbeat consumer spending report also suggested the economy maintained some of its vigor from the second quarter, when it expanded at a 3.7 percent annual rate.

Last month, spending on long-lasting goods such as automobiles increased 1.1 percent, reversing June's 1.1 percent drop. Auto purchases accounted for about half of the increase. Outlays on services like utilities rose 0.2 percent.

When adjusted for inflation, consumer spending rose 0.2 percent after being flat in June.

Personal income increased 0.4 percent in July, rising by the same margin for a fourth straight month. Wages and salaries shot up 0.5 percent, the largest rise since November 2014, after advancing 0.2 percent in June.

With income gains outpacing spending, the saving rate increased to 4.9 percent from 4.7 percent in June.

Despite the steady increase in consumption, inflation remained muted. Inflation, which has persistently run below the Fed's 2 percent target, dominated the discussions at the Fed's July 28-29 policy meeting.

A price index for consumer spending rose 0.1 percent, slowing from a 0.2 percent increase the prior month. In the 12 months through July, the personal consumption expenditures, or PCE, price index rose 0.3 percent for a second straight month.

Excluding food and energy, prices edged up 0.1 percent for the fourth straight month. The so-called core PCE price index rose 1.2 percent in the 12 months through July, the smallest rise since March 2011. It increased 1.3 percent in June.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Spending Rises in July; Inflation Muted
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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