WASHINGTON (Reuters) – U.S. consumer spending rose sharply in July, suggesting the economy was on firmer footing early in the third quarter and arguing against a half-percentage-point rate cut by the Federal Reserve next month.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after an unchanged 0.3% increase in June, the Commerce Department reported on Friday. Economists polled by Reuters had forecast spending would accelerate 0.5%.
This suggests that consumer spending retained most of the momentum from the second quarter, when it helped boost gross domestic product growth to an annual rate of 3.0%. The economy expanded at a pace of 1.4% in the January-March quarter.
There are concerns about the health of the economy after the unemployment rate jumped to a near three-year high of 4.3% in July. The fourth straight monthly increase in the jobless rate led financial markets and some economists to put a 50 basis point rate cut on the table as the U.S. central bank began a widely expected policy easing program in September.
The slowdown in the labor market, driven largely by a decline in hiring rather than layoffs, has caught the attention of policymakers. Fed Chairman Jerome Powell said last week, “the time has come for policy to adjust.”
Most economists think the Fed will resist a half-percentage point rate cut as long as the economy keeps growing and inflation remains above the central bank’s 2% target, even as price pressures continue to ease.
The personal consumption expenditures (PCE) price index rose 0.2% last month after an unchanged 0.1% gain in June, the report also showed. Economists had forecast PCE inflation to rise 0.2%. In the 12 months through July, the PCE price index rose 2.5%, matching June’s gain.
Excluding volatile food and energy components, the PCE price index rose 0.2% last month, matching the increase in June. In the 12 months through July, core inflation rose 2.6% after rising by the same amount in June.
The Fed follows PCE price measures for monetary policy and has kept its policy rate at the current level of 5.25%-5.50% for more than a year. It has raised it by 525 basis points in 2022 and 2023.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)
