Consumers slowed spending and businesses cut back on investment in August, signs a wobbling global economy and rising tariffs are curbing U.S. economic momentum.
Personal-consumption expenditures, or household spending, edged up a seasonally adjusted 0.1% in August from July, the Commerce Department said Friday. The modest growth marked a sharp pullback from the first seven months of the year, when spending rose an average of 0.5% a month.
American consumers had been a bright spot in the economy. But weaker August spending showed consumers might be succumbing to some of the external headwinds that have shaken businesses and manufacturers for months.
Slowing global growth, fading effects from the 2017 tax cut and rising trade frictions are weighing on the U.S. economy.
“The domestic economy is not immune to all these headwinds,” said Lydia Boussour, U.S. economist at Oxford Economics. “The economy is gradually cooling.”
Consumer spending is the driving force behind the U.S. economy, accounting for more than two-thirds of total economic output. Another key source of demand in the economy, business investment, continued a stretch of weakness in August, according to a separate report Friday. Orders for long-lasting equipment and machinery, a proxy for business investment, fell 0.2% last month from July and 1.7% from August 2018.
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Though some economists said Friday’s report exaggerated the extent of weakness among consumers, the pullback in consumer outlays and business investment bode poorly for third-quarter economic growth.
Economists lowered their estimates of third-quarter economic growth in the wake of Friday’s data. Macroeconomic Advisers’ closely watched model for gross domestic product showed growth slowing to 1.6% in the third quarter, down from a previous estimate of 2.2%. Pantheon Macroeconomics, meanwhile, cut its forecast for third-quarter consumer-spending growth to 2.9% from 3.6%.
Other economists pointed to evidence that consumers remain on relatively solid footing. Much of the slowdown in consumer outlays in August could be traced to lower energy prices, which magnified a pullback in spending on gasoline and other energy goods. Expenditures on services slowed only modestly, while outlays on long-lasting consumer goods such as cars and furniture picked up.
“Furnishings and household durables are something that consumers tend to spend on when they feel relatively confident,” said Sonia Meskin, a senior economist at Standard Chartered.
For Ann Wingrove, president of Frankfort, Ky.-based gift shop Completely Kentucky, demand is still solid. Her store’s sales have increased about 9% this year compared with last as more customers trickle in to buy pottery and gift baskets. But tariffs are creating uncertainty about the future.
“I’m very concerned about consumer spending and how these tariffs are going to affect that,” she said.
Completely Kentucky received notifications from one vendor, a Kentucky-based silk scarf artist, suggesting the gift store should make purchases before a 25% tariff for silk from China hits. If the scarf prices go up, Ms. Wingrove fears Completely Kentucky will have to raise prices and sell fewer scarfs.
“I’m heavily staffed now so I am very concerned if our sales drop, I will have to lay people off,” she said.
Other indications point to conditions supportive of consumer spending. Incomes grew 0.4% in August from a month earlier, led by a 0.6% jump in employee compensation. Annual inflation also remained low, undershooting the Fed’s 2% target.
Consumer sentiment, a measure of household sentiment released by the University of Michigan on Friday, rose to 93.2 in September, up from August’s 89.8, though it was down 6.9% from September 2018. That represents the largest year-over-year drop since April 2016.
Richard Curtin, the survey’s chief economist, said the September numbers showed a “slow erosion” while remaining “quite favorable.”
The outlook for consumers remained cloudy, as the Trump administration hit a new array of consumer products imported from China with higher tariffs at the beginning of this month.
—Likhitha Butchireddygari contributed to this article.
Write to Sarah Chaney at sarah.chaney@wsj.com and Paul Kiernan at paul.kiernan@wsj.com
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2019-09-27 17:19:00Z
https://www.wsj.com/articles/u-s-consumer-spending-slowed-sharply-in-august-11569587637
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