US Consumer Spending Beats Estimates, Unsupportive to GDP and Inflation

05.08.2016

US consumption accelerated in June with a brighter outlook toward the end of Q2, whilst disposable incomes stagnated, resulting in a lower savings rates, whilst inflation still underperformed, weighing on growth prospects.

The key driver of the US economy, domestic consumption, surpassed earlier estimates accelerating in June with automotive sales hitting their eight-month highest the following month. Nonetheless, gains in consumer spending are still insufficient to support an across-the-board improvement in the broader economy, as inflation remains below the Federal Reserve's target and job market's health assessments are contradictory at best. The pickup in consumption might, however, suggest a better overall economic performance in Q3.

Gains in US consumer spending for June exceeded the increase in disposable income, resulting in lower savings rate for the month, the Department of Commerce reported on Tuesday. Low inflation remained a concern throughout the period, whilst declines in business investment, and dismal growth figures for 2Q16 will likely result in the Federal Reserve's further protraction on rate hikes.

"The latest GDP release favors our hypothesis of an imminent endogenous labor market slowdown over a more optimistic scenario in which productivity will replace employment as the engine for growth," Dominic Konstam of Deutsche Bank observed. "With real GDP growing at just 1.2%, there is little evidence that productivity is ready to do the heavy lifting. We are particularly concerned because annual nominal growth has slowed to 2.4%, essentially a cyclical trough."

According to the Commerce Department figures, consumer spending gained 0.4 percent in June after a similar 0.4 percent uptick the previous month. Earlier predictions for June suggested a 0.3 percent advance. Inflation-adjusted, June consumption gained 0.3 percent, whilst that in May rose 0.2 percent.

"As the earliest reliable indicator of durable goods consumption, today's sales results bode well for real July consumption growth," Jesse Hurwitz of the New York branch of Barclays said.

Annualized gains in consumption, driving over 70 percent of the US GDP, climbed to 4.2 percent. A separate measure, the GDP reports' Personal Consumption Expenditures reported on 30 July, posted a gain of 2.8 percent year-on-year, suggesting the non-consumption sectors of the US economy actually slashed some roughly 1.6 percent off 2Q16 economic growth.

"The continued buoyancy in consumption expenditures points to a favorable handoff to the third quarter, but the soft price pressures add to the narrative of the weakening inflationary backdrop, which will argue for caution at the Fed," Millan Mulraine of New York-based TD Securities said.

Declines in inventories, business investment, construction financing and governmental money injections have all weighed on broader growth in Q2.


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