What's going on?
The average American made and spent a bit more money in July than in June – and that’s a fairly good sign for the overall economy.
What does this mean?
The data out on Monday was exactly in line with what economists expected: “personal consumption,” which is a measure of how much Americans spent on everything from Uber rides to restaurant meals, jumped 0.3%, while people’s incomes rose 0.4% (both versus June). Personal consumption is important because it accounts for more than two-thirds of overall economic output in the US. It’s become particularly important recently as the environment for businesses appears to have weakened somewhat – that’s left the US economy even more reliant on personal spending for its growth.
Why should I care?
The bigger picture: Inflation does not appear to be increasing.
Inflation is the rate at which prices in the overall economy rise. Earlier this year, some economists were worried that inflation might start increasing more quickly, but that theory, so far at least, looks incorrect. One important measure of the inflation rate was included in Monday’s data and showed prices rose only 0.8% versus one year ago, which is the smallest 12-month increase since March (i.e. the rate of inflation has fallen somewhat).
For the markets: Data like this will grab investors’ attention in the coming weeks.
After a bunch of comments from US Federal Reserve (“the Fed”) officials last week, investors are ascribing about a 25% chance that the Fed will raise its target interest rate at its next meeting (on September 21st). The Fed says it’s “data dependent,” which means that economic data such as this will drive their decision-making. Stronger economic data is supportive of an interest rate increase partly because it suggests that the economy is more able to withstand the (slight) headwind that an interest rate hike would create (e.g. higher interest rates make it more expensive to borrow, and therefore, spend money).