US consumer spending grew by an impressive 0.8%m/m in July. This compares with a revised decline of -0.1%m/m in June. The July reading was much better than market expectations, which was for an increase of 0.5%m/m; and a very welcome piece of positive economic data given that consumer spending represents a little over 70% of the US economy.
In contrast, consumer income rose by 0.3%, which was in-line with market expectations, suggesting that the household sector’s personal savings rate moved lower during the month – which is actually good news at this stage of the US economic recovery.
There has emerged a very clear pattern in recent US economic data, which we have been highlighting for a while. The pattern is that while economic data for May and June have been extremely weak (which lead to the downward revision to growth forecasts), the economic data for July has been noticeably better. This pattern is especially evident in vehicle sales, employment, industrial production, and consumer spending (see charts attached). Other economic data that improved in July includes retail sales and durable goods.
The concern is that although the July data has been uniformly better, the few August data points that are available have been exceptionally weak. This includes the University of Michigan consumer confidence index and the US Philadelphia Fed Index. If the weakness seen in these data points is reflected in other August readings, then the outlook for the US economy will worsen.
World equity markets clearly focused on the improved July consumer spending data out today, but there are two crucial data points to watch this week. The first is the ISM manufacturing index for August, which is due out on Thursday, and the US non-farm payroll data for August, due out on Friday. These two data readings are expected to have softened in August (ISM expected to fall below 50 and non-farm payrolls to show a gain only 75 000 jobs), but the actual reading will provide a vital clue as to the current state of the US economy in a post debt-ceiling debacle and S&P downgrade world.
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