Despite concerns over a potential deceleration, America's economic engine continues to operate vigorously.
Retail spending in the U.S. slightly increased by 0.1% in August compared to July, as per the Commerce Department's report on Tuesday. Although this is a slower growth rate than July's revised 1.1%, it surpassed the predicted 0.2% decline. The figures account for seasonal fluctuations but not inflation.
This growth is seen as positive for the American economy, as consumer spending accounts for nearly two-thirds of the nation's economic output. Retail sales contribute substantially to total spending.
Published on Tuesday, this report is the last significant economic update before the Federal Reserve declares its upcoming interest rate decision on Wednesday. The figures do not significantly impact the envisaged rate reduction's magnitude. The debate concerning whether the Federal Reserve will implement a quarter-point rate decrease or a half-point adjustment has intensified of late.
The U.S. economy's health, particularly the labor market, is highly relevant to the Federal Reserve and Wall Street, which anticipates aggressive rate reductions from the central bank. Presently, employers are hiring fewer workers, and it's more challenging for job seekers to secure new employment. The unemployment rate has seen a rapid increase over the last year, reaching 4.2% last month from 3.8% in the previous year.
A stagnant job market could lead to a substantial decline in consumer spending, potentially negatively impacting the U.S. economy. Businesses would then be compelled to readjust their hiring strategies, with consumers spending less, potentially initiating a negative feedback loop where consumers spend less due to layoffs, according to economists. The Federal Reserve might intervene to prevent this by reducing borrowing costs.
Cautious consumer expenditure plans
Although consumer spending remains higher than pre-pandemic levels, recent surveys display a slight decrease in spending for the near future.
In August, respondents to the Federal Reserve Bank of New York's survey reported a 5% annual increase in nominal household spending, up from 4.6% in April.
However, the survey showed a slight decrease in projected monthly overall spending growth, which slowed down to 3% in August. Despite this, it remains above the levels seen in 2019, although it falls below the peak of 5.4% in April 2022.
A separate survey from Bank of America published on Friday mirrored this trend, suggesting a decrease in spending expectations for the years to come, both on the 3-month and 12-month horizons.
"This suggests a consumer becoming increasingly selective about where they spend their money," said Robert F. Ohmes, research analyst at Bank of America Securities.
This cautious spending attitude is likely more due to budget adjustments rather than unemployment fears, Ohmes stated, citing food prices as an example. In the decade preceding the pandemic, food prices maintained a relatively stable growth rate of less than 1%.
However, food price inflation has jumped significantly in recent years, reaching a 27% increase compared to five years ago. If earnings have risen by 15%, but food prices have escalated by 27%, consumers must necessarily purchase less of a specific product to maintain their financial position, Ohmes explained.
Food price inflation has decreased significantly over the past year, according to Consumer Price Index data. As of August, grocery prices were increasing at an annual pace of 0.9%, aligning with the average rate seen in 2019, according to data from the Bureau of Labor Statistics.
CNN's Alicia Wallace contributed to this report.
The positive retail spending growth can boost the American business sector and contribute to overall economic expansion. Cautious consumer expenditure plans, driven by budget adjustments and food price increases, may impact the future of various businesses.
