Americans took a break in August after spending at a solid pace the past few months. While that's no cause for alarm yet, consumption has been doing all the heavy lifting for the economy, so its ups and downs matter.
Consumer purchases, the biggest part of the economy, were little changed after a 0.4 percent advance in July that was revised up, Commerce Department figures showed Friday. After adjusting for inflation, spending fell for the first time since January, while after-tax incomes also cooled.
"It's not the worst thing ever," said Tom Simons, a money-market economist for Jefferies LLC, which correctly projected the drop in real spending. "The consumer should come off the sidelines a bit more in coming months. Third-quarter consumer spending should be a little more moderate but still strong, reflecting a solid, healthy base."
The latest results were foreshadowed by a drop in retail sales and a slowdown in demand for automobiles. Solid hiring, cheap gasoline and groceries, low borrowing costs and optimism about finances indicate consumption will deliver a smaller but still-respectable contribution to U.S. growth this quarter.
Consumption is on pace to rise 2.7 percent this quarter, according to the Atlanta Fed's GDPNow gauge, which shows economic growth tracking at 2.4 percent. That marks a departure from the second quarter, when household purchases jumped at a 4.3 percent annualized rate, the strongest three-month period since the end of 2014.
Adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases fell 0.1 percent in August after climbing 0.3 percent the previous month, the Friday report showed. The decline matched a January decrease that was the largest since the start of 2014.
No worries yet
"We expect data over coming months to bear out our view that the August data are a one-off soft spot rather than the start of something more ominous," Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama, said in a note. "The decline in real consumer spending in August is nonetheless disconcerting."
The focus now turns to next week's key employment and manufacturing data to provide a better read on where things are headed. Payrolls probably climbed by about 170,000 in September, according to the median Bloomberg forecast, indicating hiring is settling into a more sustainable pace. The Institute for Supply Management's index of factory purchasing managers is projected to show manufacturing stagnated in September.
Recent data raise "questions regarding the prospects for above-trend growth over the remainder of 2016 and 2017," Andrew Hollenhorst, a fixed-income strategist in New York at Citigroup Global Markets Inc., said in a note. "But we would not read too much into today's print, and await next week's jobs and ISM reports for a better read on underlying strength."
Some economists were more cautious, looking at what the results mean for Federal Reserve Chair Janet Yellen and her colleagues, who met earlier in September to determine the appropriate time to raise interest rates.
"Yellen's press conference explanation of 'strong household spending' carrying the economy needs a rewrite already," economists Chris Low and Sophia Kearney-Lederman at FTN Financial said in a note after the report.
"Higher savings typically indicates a fearful consumer, at odds with recent strong consumer confidence readings," they wrote. The saving rate rose to 5.7 percent in August from 5.6 percent.
Another report Friday served to damp doubts that the consumer was retrenching. Americans' confidence rose in September for the first time in four months as consumers grew more upbeat about the prospects for incomes and persistent low inflation, according to the final index of sentiment by the University of Michigan.