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Consumer Spending Holds Firm

Americans continued to open their wallets in July, with consumer spending rising 0.5% from June, according to Commerce Department data released Friday. While slightly below economists’ expectations of a 0.6% increase, this marks a pick-up from June’s 0.4% gain, showing resilience in household consumption despite persistent inflationary pressures.

July is traditionally a month of summer sales and back-to-school shopping, yet the bulk of last month’s spending growth came from auto purchases and financial services, buoyed by strong stock market gains.

When adjusted for inflation, spending grew 0.3% in July, accelerating from 0.1% in June, signaling that real purchasing power is holding steady for many consumers.

Inflation Trends and Federal Reserve Gauge

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, rose 0.2% month-on-month, keeping the annual rate at 2.6%. The core PCE, which excludes volatile food and energy costs, climbed 0.3% from June, nudging the annual rate up to 2.9%.

“Consumer spending remains solid, and goods inflation is moderate for now,” said Chris Rupkey, chief economist at FwdBonds, highlighting that tariffs have yet to severely disrupt economic activity or trigger alarming inflation spikes.

Wage Gains Fuel Spending

Robust income growth underpinned the spending trend. Personal income increased 0.4% in July, up from 0.3% in June, reflecting stronger wages across multiple sectors. The personal savings rate held steady at 4.4%, showing that Americans are still allocating part of their earnings to spending.

July also marked the first month since March where monthly spending exceeded income, a sign that consumers are willing to spend in anticipation of deals and seasonal promotions. Durable goods, particularly appliances, cars, and home equipment, drove much of the increase.

Durable Goods and Auto Purchases

Spending on durable goods jumped 1.9% in July, the largest monthly rise since pre-tariff activity in March. Auto-related purchases were a major contributor, while spending on furnishings, recreational goods, and home equipment also rose modestly.

Wells Fargo economists noted that spending on big-ticket items had declined in May and June amid tariff concerns, but July’s rebound suggests some of those worries are easing. However, consumers are pulling back on discretionary services, with recreational services seeing the smallest monthly gain, and spending at hotels and restaurants declining.

Entering a “Stagflation-Lite” Phase

Economists warn that the U.S. may be entering a stagflation-lite period, characterized by elevated inflation, slowing growth, and potential job pressures. Tariff-driven price increases are being absorbed slowly, as businesses delay passing costs to consumers and inventories remain high.

“This environment differs from 2022, when households had pandemic savings cushions and stimulus payments,” said Heather Long, chief economist at Navy Federal Credit Union. “Now, consumers are more price-sensitive, limiting the pass-through of tariffs.”

Economists anticipate that the Federal Reserve may cut rates in September and December, balancing inflation control with the risk of slowing economic growth and rising unemployment.

Market Reactions

Stocks reacted cautiously to the data. Dow futures fell 100 points (0.21%), the S&P 500 futures dropped 0.23%, and Nasdaq 100 futures slid 0.44% after the report, though markets later pared some losses. The spending and income data largely met economists’ expectations, offering reassurance that consumers remain a key driver of the economy despite inflationary pressures.

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