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Consumer spending increases 0.5% in July

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PCE price index rises 0.2%, advances 2.5% year-on-year

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Core PCE inflation gains 0.2%; up 2.6% year-on-year

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Personal income climbs 0.3%; saving rate falls to 2.9%

By Lucia Mutikani

WASHINGTON, Aug 30 (Reuters) - U.S. consumer spending

increased solidly in July, suggesting the economy remained on

firmer ground early in the third quarter and arguing against a

half-percentage-point interest rate cut from the Federal Reserve

next month.

The report from the Commerce Department on Friday also

showed prices rising moderately last month, curbing inflation.

A jump in the unemployment rate to a near three-year high of

4.3% in July stoked fears of a recession, leading financial

markets and some economists to put a 50-basis-points rate

reduction on the table when the U.S. central bank embarks on a

widely anticipated policy easing in September.

Fed Chair Jerome Powell last week signaled that a rate cut

was imminent, in a nod to the worries over the labor market.

"There is nothing here to push the Fed to a half-point cut,"

said Conrad DeQuadros, senior economic advisor at Brean Capital.

"This is not the kind of spending growth associated with

recession."

Consumer spending, which accounts for more than two-thirds

of U.S. economic activity, rose 0.5% last month after advancing

by an unrevised 0.3% in June, the Commerce Department's Bureau

of Economic Analysis reported. The increase was in line with

economists' expectations.

After adjusting for inflation, consumer spending gained 0.4%

after rising 0.3% in June, and implied that spending retained

the momentum from the second quarter, when it helped to boost

gross domestic product growth to a 3.0% annualized rate.

The economy grew at a 1.4% pace in the January-March

quarter. The Atlanta Fed raised its third-quarter GDP growth

estimate to a 2.5% rate from a 2.0% pace.

The increase in spending was across both goods and services,

with outlays on motor vehicles and parts leading the charge.

Consumers also spent more on housing and utilities, food and

beverages, recreation services as well as financial services and

insurance. They also boosted spending on healthcare, visited

restaurants and bars and stayed at hotels.

Consumers also bought more recreational goods and vehicles

as well as furnishings and long-lasting household equipment.

While the labor market momentum has slowed, it continues to

generate decent wage growth that is helping to underpin

spending. The slowdown in the labor market is mostly driven by a

step down in hiring rather than layoffs.

Personal income rose 0.3% last month after gaining 0.2% in

June. Wages climbed 0.3% after increasing 0.2% in June.

SAVING RATE DROPS

The saving rate dropped to 2.9%, the lowest level since June

2022, from 3.1% in June. Economists were, however, not in

agreement on the implications of the decline with some arguing

that the government was not fully capturing income earned by

undocumented immigrants.

Others argued that households were drawing down on savings

to maintain spending, which could imperil future consumption.

Yet another group was unperturbed by the decline in the saving

rate, pointing to strong household balance sheets against the

backdrop of higher house and stock prices.

Undocumented immigrants have also been cited as one of the

factors behind the Labor Department's Bureau of Labor Statistics

estimate last week that employment gains were overstated by

68,000 jobs per month in the 12 months through March.

The so-called benchmark revision estimate is based on a data

set derived from reports by employers to the state unemployment

insurance programs. The data does not include undocumented

immigrants, a group that economists believe contributed to

strong job growth last year.

"The BEA could be undercounting income earned by recent

immigrants, whose economic activity is harder to measure than

workers who have been in the U.S. longer," said Bill Adams,

chief economist at Comerica Bank.

"That could mean the saving rate is higher than is currently

reported, and would be revised higher when more accurate

employment and earnings data become available."

Stocks on Wall Street were trading higher. The dollar

rose against a basket of currencies, while U.S. Treasury prices

fell.

August's employment report scheduled to be released next

Friday will likely determine the size of the September rate cut.

The personal consumption expenditures (PCE) price index rose

0.2% last month after an unrevised 0.1% gain in June, the report

also showed. Goods prices were unchanged after falling for two

straight months. Declines in the prices of motor vehicles and

other long-lasting manufactured goods were offset by gains in

take-out food and other nondurable goods.

The cost of services increased 0.2% for a third straight

month, lifted by rises in housing and utilities, recreation

services as well as financial services and insurance. Healthcare

prices were unchanged while the cost of transportation services

decreased for the fourth consecutive month.

In the 12 months through July, the PCE price index increased

2.5%, matching June's gain. The increase in PCE inflation was in

line with economists' expectations.

Excluding the volatile food and energy components, the PCE

price index rose 0.2% last month, matching the increase in June.

In the 12 months through July, core inflation increased 2.6%

after advancing by the same rate in June.

Core inflation increased at a 1.7% annualized rate in the

three months through July. The Fed tracks the PCE price measures

for its 2% inflation target, and has maintained its policy rate

in the current 5.25%-5.50% range for more than a year, having

raised it by 525 basis points in 2022 and 2023.

"The data suggest inflation is on track to hit the Fed's

2% target," said Pooja Sriram, an economist at Barclays. "We

maintain our baseline call for three Fed rate cuts this year."