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Consumers Tap Savings

RFP
Personal disposable incomes edged up only 0.1% after adjusting for inflation in July. Consumer spending posted a much stronger 0.4% inflation adjusted gain, double the pace of June. Everything from Amazon Prime Day and matching deals to discounts on SUVs prompted consumers to dip into their savings to spend more aggressively over the month. Unusually warm summer weather also boosted spending on household electricity and gas.

The saving rate dropped to 7.7% in July from 8% in June. That marks the lowest rate in nearly a year. Indeed, the saving rate came down fairly significantly after peaking at the turn of the year but remains well above the post WWII average.

Separately, the Personal Consumption Expenditures (PCE) index, which is the Federal Reserve’s favored measure of inflation, edged up 0.2% in July. That translates into a 1.4% increase on a year-over-year basis but is tepid compared to the Fed’s 2% target. The core PCE (excluding food and energy prices), the best predictor of future inflation, held at a 1.6% pace from one year ago in July. That will disappoint those on the Federal Reserve who had hoped some of the heat we saw in the Consumer Price Index (CPI) during the month would show up in the more accurate PCE index.

One of the factors that gave pause to many on the Federal Open Market Committee (FOMC) - the policy setting arm of the Fed - over cutting rates in July was a sense that consumer inflation may be on the cusp of finally accelerating again. This report suggests those hopes were overblown and will feed what is expected to be a slim majority supporting another rate cut in September.

Bottom Line
Consumers dipped into their savings to spend more in July. It is unclear how long they will continue to do so, given the slowdown in incomes and prospect of more tariffs on the horizon. August spending will probably remain strong as consumers scramble to buy ahead of tariffs starting on September 1, but those gains will likely borrow from gains in the fourth quarter. We could see another anemic end to the year if the trade war persists.

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