Briefing at a Glance

  • Despite bleak employment prospects and inflation persistently above the Federal Reserve's 2% target, consumer spending remained stable last month.
  • Data released by the U.S. Bureau of Economic Analysis (BEA) on Friday showed that consumer spending rose 0.4% month-over-month in August, matching July's pace; excluding volatile food and energy prices, the Personal Consumption Expenditures (PCE) price index remained at 2.9% year-over-year. Consumers continued to open their wallets amid price pressures and cracks in the job market—the unemployment rate rose 0.1 percentage point to 4.3% last month.
  • "Consumers are feeling pressure from both the prospect of rising inflation and the risk of a weakening labor market," Joanne Hsu, director of the University of Michigan's consumer survey, said in a statement on Friday. She noted that the consumer confidence index fell 5% this month, "broadly across age, income, and education groups."

In-Depth Analysis

The surprisingly strong consumer spending data follows Thursday's revision of U.S. second-quarter GDP growth from 3.3% to 3.8%. The BEA said business spending on artificial intelligence and software, as well as higher-than-expected spending on services, drove economic growth.

In response to these data, the Atlanta Fed on Friday raised its third-quarter GDP growth estimate (annualized) to 3.9%, up from 3.3% on September 17.

Consumers contribute nearly 70% of economic growth, and Richmond Fed President Tom Barkin said on Friday there are no signs consumers are losing confidence. "After lying dormant in the spring, recent data show consumers resumed spending in the summer, especially among higher-income groups," Barkin said in a speech. "Why wouldn't they?" he asked. "Unemployment is still very low, nominal wages are still growing, and asset valuations are near historic highs."

Barkin also noted that businesses have reason for optimism. "Second-quarter earnings were strong, and stock prices continue to climb," he said. "As the government's path becomes clearer, uncertainty seems to be declining." He added that a recent regional Fed CFO survey showed business optimism rose to its highest level since 2021.

The combination of a weakening labor market and persistently high price pressures puts the Federal Reserve in a dilemma in fulfilling its dual mandate from Congress—maximizing employment and stabilizing prices. Barkin said that in recent years, with a healthy job market, policymakers focused on curbing above-target inflation. "Now, inflation risks remain elevated, but downside risks to employment have risen, and we face a more challenging situation." He also supported the Federal Open Market Committee's decision this month to cut the key interest rate by 25 basis points to a range of 4% to 4.25%. "This should help support the labor market while maintaining pressure on inflation," Barkin said.

Some households worried about price pressures may not want the central bank to further lower borrowing costs. "Consumers continue to express dissatisfaction with the persistence of high prices, with 44% spontaneously mentioning that high prices are eroding their personal finances—the highest proportion in a year," Hsu said. She also noted that long-term inflation expectations rose for the second consecutive month in September, reaching 3.7%.