Personal spending rose by 0.8% in August, following a downwardly revised decrease of 0.1% in July and showing the strong impact of the extra incomes from the enhanced child tax credit that began in July.
The child tax credit helped to offset the continuing decline in spending on automobiles, and food services and accommodations.
The direct payments to families from the tax credit helped to offset the continuing decline in spending on automobiles, which fell by 6.3%, and food services and accommodations, which posted no change amid the spread of the delta variant in August, according to government data released on Friday.
And in another sign of the delta variant’s impact, consumers in August shifted from outdoor and in-person contact spending to home goods, and food and drink off-premises.
Real spending increased 0.4% on the month after adjusting for inflation. The gain made up some ground after a disappointing 0.5% decline in July. Still, we expect that spending will cool down in September following the expiration of pandemic-related federal unemployment benefits on Sept. 6, which affected millions of workers.
Income ticked up by only 0.2% in August following a significant one-off jump of 1.1% in July, when families started to receive payments from the enhanced child tax credit.
After government transfers are excluded, personal income was down by 0.3% in August as gains in wages and compensations decelerated, while incomes from the Paycheck Protection Program (PPP) continued to phase out, declining by $51.6 billion.
Inside the report
Except for spending on autos, all goods-spending categories posted gains in August, led by the increases in food and beverages off-premises, which rose by 2.7%, and furnishings and household durable goods, which rose by 3.4%.
Spending on services increased for the sixth consecutive month, rising by 0.6% in August, although it has shown some deceleration in recent months.
Spending on health care services, housing and utilities led the gains in services spending, mostly because of the surge in the delta variant in August. Each rose by 0.6% on the month.
Also in the report, the savings rate declined to 9.4% after a brief one-month increase in July to 10.1%, a function of the extra income from the child tax credit.
This suggests that even in the face of the delta variant, consumers did not pull back from spending. But this level of savings is still above the pre-pandemic long-term rates.
Inflation inches up
The headline Personal Consumption Expenditures deflator—the Federal Reserve’s inflation gauge—rose 0.4% in August, a slight increase from July’s reading of 0.3%. This measure was up by 4.3% from a year earlier.
The core PCE, excluding food and energy, rose by 0.3% for the second consecutive month and was up by 3.62% from a year earlier, matching the highest gain since 1991.
Inside the core PCE, prices of automobiles continued to lead the increases in goods prices, up by 13.8%, while public transportation prices posted highest gain in service prices, up by 25.9%.
Even though this slight increase in the inflation indicator was a surprise—early estimates had pointed to a slight decrease in both monthly and yearly core PCE—supply bottlenecks remain an issue and are the main cause of the increase.
This dynamic is reflected in the sharp price gains in automobiles, up by 13.8%, and household durable goods, which rose by 4.8%. Both of these industries have been plagued by shortages of raw materials and labor.
At the same time, service prices inched up by only 0.1 percentage point to 3.6% in August on a yearly basis, largely driven by public transportation prices, which increased by 25.9%, and food services and accommodation, up by 4.8%.
The takeaway
We expect that as the spending data suggests, a pullback on public and in-person spending will help to ease some of the pressure on services prices, while supply bottlenecks and labor shortages will most likely persist until the end of this year, continuing to add upside risk on goods prices.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
