Consumer spending beats expectations in August
American consumers opened their wallets wider than expected in August, as spending rose 0.6% compared to July. The uptick was fueled by vacations, restaurant outings, and hotel stays, signaling economic momentum despite persistent inflation and a cooling labor market. Spending on services rose 0.5%, while goods outlays jumped 0.8%.
This consumer resilience helped maintain strong third-quarter GDP expectations, with the Atlanta Fed revising its estimate to 3.9% growth, up from 3.3%. High-income households, bolstered by record stock and housing wealth, are driving much of this consumption. In contrast, lower-income Americans face mounting pressure from rising prices and reduced federal assistance.
Friday’s Commerce Department report showed that while hiring has slowed, demand for services like airline travel and financial products remains robust. Meanwhile, inflation picked up slightly, with the PCE Price Index rising 0.3% monthly and 2.7% year-over-year — the highest annual rate since February.
Tariffs and inequality widen the spending divide
President Donald Trump’s new tariffs, including a 100% duty on branded medications and a 25% levy on heavy-duty trucks, are adding fuel to inflationary pressures. While businesses have so far absorbed some costs, economists warn that companies may soon pass these on to consumers as inventories shrink.
Tariff-driven price increases are not evenly distributed. Lower-income families, who rely more heavily on imported goods and federal assistance, are feeling the pinch. Cuts to food stamp programs and higher prices on essentials are creating a financial squeeze, even as wealthier households continue to spend.
Economists expect spending growth to taper off in the coming months as consumers become more cautious. The saving rate dropped to 4.6% in August, its lowest level in eight months, suggesting households are tapping reserves to sustain current spending levels.
Labor market cools but inflation stays elevated
While consumer demand remains high, the labor market is showing signs of strain. Job growth has nearly stalled over the last three months, impacted by trade uncertainty and immigration policies reducing the workforce. Wages rose just 0.3% in August, contributing to increased reliance on savings.
Despite the cooling labor market, core inflation remains stubbornly above the Federal Reserve’s 2% target. The core PCE Index, which excludes food and energy, rose 0.2% in August and 2.9% over the past year. This steady inflation complicates the Fed’s path forward after cutting rates last week to a range of 4.00% to 4.25%.
Though markets still expect two more rate cuts in 2025, analysts caution that rising inflation and resilient consumer demand may limit further easing. Some economists argue there’s little justification for additional cuts based on the latest data.
Outlook: Slower growth, more caution ahead
The mixed picture — strong spending and inflation but a softening labor market — paints a complex backdrop for the U.S. economy. As households draw down savings and tariffs continue to bite, analysts anticipate a slowdown in consumption later this year.
The Fed’s preferred inflation gauge is sending warning signs. Services inflation is accelerating, especially in categories like travel and insurance. Goods prices, though more stable, may climb further as businesses pass on costs. A delayed inflation effect from tariffs remains a key risk heading into year-end.
In this environment, economic inequality is becoming more pronounced. High-income earners are buoyed by asset gains, while vulnerable households are caught between rising costs and stagnant wages. The Fed faces a tough balancing act: curb inflation without crushing already fragile segments of the labor force.
