Consumer spending slowed and businesses cut back on investment, indicators that a wobbling global economy and rising tariffs are gathering headwinds that are slowing U.S. economic momentum.
Consumer spending has been a bright spot for the economy and has helped sustain somewhat solid pallet demand. In fact, households ramped up spending in July 0.6% from June, a pickup from the previous two months, despite slowing factory activity and global growth.
However, spending for personal consumption edged up only 0.1% in August from July. That modest growth marks a sharp pullback from the first seven months of the year, when spending rose an average of 0.5% per month.
“The domestic economy is not immune to all these headwinds,” Lydia Boussour, U.S. economist at Oxford Economics, told The Wall Street Journal. “The economy is gradually cooling.”
Consumer spending is the driving force behind the economy; it accounts for more than two-thirds of total economic output.
Another key source of demand in the economy, business investment, continued a stretch of weakness in August. Orders for durable equipment and machinery, a proxy for business investment, fell 0.2% from July and 1.7% from August 2018.
Some economists contend the figures for August exaggerate the extent of weakness among consumers, noting evidence that consumers remain on relatively solid footing. Much of the slowdown in consumer outlays in August was traced to lower energy prices, which magnified a pullback in spending on gasoline and other energy goods. Spending on services slowed only modestly, and spending increased for long-lasting consumer goods, such as cars and furniture.
Still, the pullback in consumer spending and business investment bode poorly for third-quarter economic growth.
In addition, manufacturing activity declined to a 10-year low in September, a sign that the trade war with China is taking a toll on the economy. It was the second month in a row for a decline in the closely watched index of the Institute of Supply Management (ISM). September’s reading of 47.8 was its lowest since June 2009, and it was worse than what economists had expected. A reading above 50 denotes growth in the sector.
“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019,” said Timothy Fiore, chair of the ISM’s manufacturing business survey committee.
Overall pallet demand remains somewhat strong in most areas of the country. There are some sluggish pockets, and the trend could grow if consumers stop spending.
