Consumer Spending Drops, Will Fed Now Hike Interest Rates?

consumer-spending-dropsThe most recent data claims that US consumers are spending less and less at retailers, with the drop in August representative of the weakest pace in five months. This is mostly reflected by a drop in automobile purchases. In addition, though, income growth has also fallen, with salary gain showing a slowdown for at least the fourth straight month.

Actually, consumer spending last month remains unchanged after 0.4 percent of solid gains in July, only slight up from the 0.3 percent rise in June, says the United States Department of Commerce. Furthermore, though, personal incomes rose only about 0.2 percent last month, which is half the pace of July and, more importantly, the weakest metric since the 0.1 percent drop in February. Wages and salaries, of course, are the biggest income category, and they only posted a rise of 0.1 percent after two months of only 0.5 percent improvements.

Economists expect, now that the August slowdown will be temporary, hoping that consumers will help the economy grow—as measured by shifts in the Gross Domestic Product—from its current 3 percent trajectory (the July through September performance metric).

“Consumers took a breather in August,” remarks Chris G. Christopher Jr., who is the director of consumer economics at Global Insight. He adds, “Personal spending was flat after four months of rather sizable gains.”
Surely, consumer spending was a bit robust for the past few months, offsetting in part by a drag in business investment and lower inventories through the second quarter.
Furthermore, BMO Capital Markets senior economist Sal Guatieri explains that the results from August do, in fact, point to a somewhat lesser consumer spending pace than in the present quarter. He also tells that growth in spending would only moderate to an annual rate just shy of 3 percent through the third quarter, down nearly one third—from 4.3 percent—in the second quarter.

As such, the central bank left its key interest rate unchanged, last week, though Fed officials appear to hint at a stronger motion towards boosting the interest rate by the end of the year. Of course, they are intent on doing so as the Fed has not raised rates since one only a single, one-quarter point hike from last December.

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