Laura Rosner, an economist at BNP Paribas, described both the income and spending numbers for July as “solid”.
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According to a report by the Commerce Department published on Monday, nearly immediately after the three-day central bank meeting in Jackson Hole, strong demand for cars resulted in greater consumer spending in July.
Consumer spending appears to have retained some of its momentum from the second quarter, when it grew at a 4.4% annual rate, the fastest in almost two years.
“Personal spending will remain a key source of support for economic activity this quarter”, said Millan Mulraine, deputy chief US macro strategist at TD Securities USA (LLC).
Consumer spending rose by 0.3% from June, with the gain underpinned mainly by automobile purchases while spending on non-durable goods and services declined. Spending was previously reported to have risen 0.4% in June. As such, though, economists are now counting on solid gains within the consumer spending metric, a stat that accounts for 70 percent of economic activity, to support overall growth in the U.S. through the second half of this year. The economy expanded at just a 1.1 percent annual pace in the second quarter, after an anemic 0.8 percent growth rate in the first quarter.
Federal Reserve Chair Janet Yellen said in a speech Friday that the case for raising interest rates has strengthened in recent months in light of a solid job market and an improved outlook for the economy and inflation.
The Fed hiked interest rates at the end of last year for the first time in almost a decade, but has held them steady this year amid concerns over persistently low inflation.
The Atlanta Fed is now estimating third quarter GDP growth rising at a 3.4 per cent annual pace.
Consumer spending is being driven by a tightening labor market, which is steadily lifting wages. Rising home values and stock market prices, which are boosting household wealth, are also supporting consumption.
With incomes rising at a faster pace than spending, consumers tucked away more money last month.
Headline Personal Consumption Expenditures (PCE) came in at an annualized 0.8% (YoY) in July, which was in line with expectations for a 0.8% clip, but narrowed from a previous reading of 0.9%.
Core inflation, which excludes often volatile food and energy costs, increased 1.6 percent during the same 12-month period.
Although the pace of growth slowed, consumer spending posted its fourth straight monthly increase in July, a sign that the economy is poised for a rebound in the second-half of the year. Wages and salaries advanced 0.5 per cent. Savings rose to $794.7 billion from $776.2 billion in June.
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The spending and income data pointed to a firm rebound in USA economic growth in the third quarter, said Ian Shepherdson of Pantheon Macroeconomics.
