WASHINGTON: USconsumer spending slowed sharply in August, according to the latest governmentdata Friday, suggesting turmoil from President Donald Trump's trade wars washitting home for the general public. And in another sign trade tribulations areweighing on American industry, demand for big-ticket manufactured goods alsoshowed unwelcome weakness, economists said.
The new dataFriday caused some economic forecasters to cut their third-quarter GDP growthestimates sharply, and they also were likely to exacerbate disagreements amongUS central bankers over the path of interest rates. Federal Reservepolicymakers are increasingly divided over the direction of monetary policy butmarkets expect they will vote to cut the benchmark lending rate again this yearto cushion the trade war's impact on the economy.
But the data alsoshowed underlying inflation perking up by the most in seven months on an annualbasis in August, which economists said could put the Federal Reserve in adifficult position as it seeks to keep the longest economic expansion onrecord, now in its 11th year, on track. The Fed last week cut interest ratesfor the second time this year, citing the ongoing risks from the Trumpadministration's nearly 15-month trade war with China and slowing globalgrowth. The US central bank lowered borrowing costs in July for the first timesince 2008.
"We stillexpect the Fed will cut rates in the fourth quarter, but squaring this softread on the consumer, business investment and a slight rebound in underlyinginflation admittedly pulls the Fed in opposite directions," said TimQuinlan, a senior economist at Wells Fargo Securities in Charlotte, NorthCarolina. Consumer spending, which accounts for more than two-thirds of USeconomic activity, edged up 0.1 percent last month as an increase in outlays onrecreational goods and motor vehicles was offset by a decrease in spending atrestaurants and hotels.
On one hand, akey component of the Federal Reserve's preferred inflation measure of tickedhigher in August for the third month in a row, although it remains below theFed's two percent target, according to Commerce Department data. That couldbolster arguments against cutting interest rates again.
But on the otherhand the decline in consumer spending and weakness in durable goods orderssuggest the world's largest economy is slowing faster than expected, suggestingeasier interest rates are needed to boost it. Ian Shepherdson of PantheonMacroeconomics said Friday said the trade war made consumers"nervous" and "the consumer boom is coming to an end,rapidly."
The CommerceDepartment said disposable incomes adjusted for inflation rose 0.4 percent inAugust, the biggest increase since February, suggesting consumers have plentyof cash available. But spending slowed to show a tepid 0.1 percent gain, itssmallest monthly pace since February. Compared to the same month last year, theincrease was the weakest recorded since December 2018.
Forecasts slashed
As a result,savings rose to $1.36 trillion, the highest level since March, meaning Americanconsumers are holding onto their cash. Meanwhile, August appeared at firstglance to be a better-than-expected month for US manufacturing, with a secondstraight sales gain for military aircraft and equipment, according to aCommerce Department report.
Together with aboost in sales of primary metals, overall new orders for big-ticket, US-madeitems rose 0.2 percent, far better than the one percent drop economists hadexpected. But the data show other industries had a painful month, with notabledeclines for civilian aircraft, autos, communications equipment, electronicsand appliances. A measure seen as a proxy for business investment, and a signof future business activity, also fell in August after recording a flat July.
Taking thedevelopments into account, Macroeconomic Advisers slashed their third-quarterGDP forecast by 0.6 percentage point to 1.6 percent-about half what it was atthe start of the year. Fed Chair Jerome Powell last week said trade policytensions, which "have waxed and waned, and elevated uncertainty isweighing on US investment and exports," adding that US central bankcontacts had told policymakers that trade policy uncertainty "has discouragedthem from investing in their businesses."
The weak corecapital goods data and tepid consumer spending led economists to cut theirthird-quarter GDP estimates by as much as six-tenths of a percentage point toas low as a 1.3 percent annualized rate. The economy grew at a 2.0 percent ratelast quarter, slowing from the January-March quarter's brisk 3.1 percent pace.
"Tradeprotectionism continues to gum up US manufacturing largely by underminingbusiness investment," said Sal Guatieri, a senior economist at BMO CapitalMarkets in Toronto. Oxford Economics cut their forecast to an even-lower 1.3percent. That would be a sharp slowdown in an economy that grew 3.1 percent inthe first three months of the year and 2.0 percent in the second quarter.Federal Reserve regional branches in New York and Atlanta, however, said thenew data pointed to stronger 2.1 percent growth for the July-September period.
Elsewhere,tumbling energy prices kept a lid on overall price gains for last month, as thePersonal Consumption Expenditures price index was unchanged from July, fallingshort of economists' expectations. Compared to August 2018, the PCE priceindex, which tracks costs for goods and services purchased by individuals, rose1.4 percent, holding at the same rate for four months in a row and well belowthe central bank's two percent target.
When volatilefood and fuel prices are stripped out, the "core" price index forAugust gained a trivial 0.1 percent over July, but rose by a hotter 1.8 percentfrom a year ago. That closely-watched measure was fueled by steady gains in thecosts of US services which pushed it to its highest level since January. -Agencies