The numbers: Americans spent money at a slower pace in July as delta nipped at the economy, but households are flush with savings and consumer still show a strong appetite for a wide variety of goods and services.
Consumer spending rose by a modest 0.3% last month, the government said Friday. That matched the estimate of economists polled by The Wall Street Journal.
Spending has slowed since early spring, when Washington delivered more stimulus money for households. Yet it’s still rising fast enough to sustain a rapid economic recovery.
Incomes surged 1.1% last month, boosted by new child-care tax credit approved as part of the last federal stimulus in March. The credit will provide about $170 billion in annual subsidies for young families.
The tax credit more than offset a big decline in the amount of money government spent on on unemployment benefits last month.
Fewer people are drawing benefits either because they found jobs or were cut off. About half the states ended a temporary federal benefits program before the scheduled Sept. 6 expiration.
Big picture: The U.S. economy is still going strong even though government stimulus has faded and coronavirus cases are rising again.
Consumers feel more secure in their jobs and they have plenty of cash to spend. Companies are trying to hire to fill a record number of job openings and ramp up production. And governments are refraining from tough business restrictions they used earlier in the pandemic.
Read:Businesses still upbeat even as Delta deals small blow to economy
The U.S. economy is forecast to grow at a 7% annual pace in the current third quarter, following a 6.6% increase in the spring.
Delta aside, the biggest potential obstacle for the economy is rising inflation tied to widespread shortages of labor and materials.
Consumer spending actually fell 0.1% in July if inflation is taken into account.
Key details: The biggest increase in spending in July was on services such as dining out, renting hotel rooms or going on vacation.
Spending fell on goods such as new cars and trucks, clothing and footware.
Americans have shifted their spending toward services and away from goods as the economy mostly reopened. Millions of people have sought to do all the things they couldn’t do earlier in the pandemic that involved leaving home or being among larger crowds.
Evidence in August suggest the delta variant might have curbed some spending on services, but that it hasn’t made a huge dent so far.
The savings rate, meanwhile, rose to 9.6% from 8.8% in the prior month and easily exceeds pre-pandemic levels.
The child tax credit explained most of the increase, but millions of Americans have also gone back to work this year and are earning paychecks again to help bolster their savings.
What’s partly eroding the value of their paychecks is a big increase in inflation. The yearly rate of U.S. inflation as measured by the Federal Reserve’s preferred PCE price gauge climbed to 4.2% in July — the highest level in 30 years.
What they are saying? “Consumers still have plenty of room in their budgets to increase spending further and absorb higher prices,” said chief economist Aneta Markowska of Jefferies LLC.
“With the spike in Delta infections in August, we are likely to see a small setback in service demand,” she added, “but that will almost certainly be followed by further strength from October onwards as schools and offices reopen and travel resumes.”