In the latest update from the Commerce Department, the final revision of second-quarter gross domestic product (GDP) revealed that overall economic growth remained stagnant at an annualized rate of 2.1%. This data, however, hides a significant shift in consumer behavior as the key driver of the U.S. economy, consumer spending, saw a substantial downward revision.
Recent data released on Thursday indicates that consumer spending, which constitutes about 70% of economic output, was revised much lower to a 0.8% annualized rate. This is a notable decline from the 1.7% rate reported in the previous estimate. The second quarter of 2023 witnessed the slowest growth in consumer spending since the first quarter of 2022, reflecting a concerning trend.
The substantial downward revision in consumer spending suggests that Americans scaled back their expenditures more than initially thought. Notably, consumers reduced spending on services and nondurable goods, including clothing, cleaning supplies, and beauty products. This change in behavior is a departure from the previous trend, indicating a more cautious approach to spending among Americans.
Although the second quarter spans from April through June, monthly consumer spending figures released by the Commerce Department provide a more granular view. In July, consumer spending experienced a robust 0.8% increase, marking the most substantial monthly gain since January. Noteworthy expenditures included spending on concerts, films, toys, and recreational equipment. The figures for August are set to be released on Friday, providing additional insights into consumer behavior.
However, a report from Moody’s Investors Service suggests that consumer spending is expected to slow further in the coming months. Americans are becoming more cautious about their purchases, influenced by factors such as post-pandemic spending on deferred travel and experiences. Despite increased spending in certain sectors, tighter budgets may lead consumers to cut back on discretionary services spending, especially with persistent services inflation.
The final revision also highlighted a positive aspect of the economic landscape: business investment. Business investment in the second quarter was stronger than initially estimated, with a 7.4% annualized rate, up from the prior estimate of 6.1%. This growth was driven by increased spending on “structures,” products usually constructed at the location where they will be used and known for their long economic lives, as defined by the Commerce Department.
A closely monitored monthly measure of business investment, new orders for nondefense capital goods excluding aircraft, expanded by 0.9% in August, according to data released by the Commerce Department on Wednesday. This measure demonstrated growth in three of the six months through August, indicating resilience in business investment.
While economists do not anticipate a recession in the U.S. economy this year, there are several economic headwinds that could impact growth. In the fourth quarter, slower consumer spending on services, combined with potential challenges such as the resumption of student loan payments, a government shutdown, a strike by auto union workers, and rising oil prices, could significantly weigh on GDP. This comes at a time when the economy is already grappling with elevated prices and interest rates, as noted by Gregory Daco, chief economist at EY-Parthenon. The year ahead presents uncertainties, and the economy may face challenges that warrant careful monitoring.