The consumer has been resilient. The consumer has been extraordinary. The consumer has been spending. In the folklore of modern America, to spend is to live, and one lives to spend. But while Joe Sixpack has done everything but sell a kidney to keep on shopping in recent years, even Joe has limits. Or, to be more accurate, his wallet has limits, even if his heart is inclined to think otherwise.
The inspiration for the above observation comes by way of this morning’s Personal Income and Outlays report for June, which details that Joe and his counterparts across the country raised their consumption last month at the slowest pace since December 2005.
Yes, consumer-spending increases have been lower in recent history, as our chart below illustrates. But the latest slowdown comes at a time when the real estate market is showing signs of a downshift, suggesting that the economy may be winding down in earnest as well. Consumer spending after all represents more than two-thirds of GDP, and so the prevailing winds by this gauge carry more than a trivial impact on the economy as a whole.

But if you thought that today’s report gives the Fed a clear and unambiguous justification for halting future rate hikes so as to renew Joe’s spirits (and spending), think again. The core personal consumption expenditure inflation rate rose 2.4% last month vs. June 2005, today’s report advised. That the highest rate since April 1995. Since this is reported to be the Fed’s preferred measure of inflation, we take it that the numbers didn’t go over well this morning at the world’s most important central bank.
The FOMC meets next on August 8 to weigh in on monetary policy. To say that today’s report on spending and inflation complicates next Tuesday’s Fed confab is an understatement. But at the moment, if the central bank must choose between juicing the economy by pausing with rate hikes or fighting inflation by keeping up the monetary squeezing, the latter seems the preferred course.
In fact, the Fed funds futures contract for August has slipped a bit this morning, giving a bit of support for the idea that another rate hike may yet arrive. Even so, the contract’s price reflects a trading community that’s still unsure of what comes next. That seems eminently reasonable if only because the Fed probably doesn’t have a clue about the future either. Such is life when the Fed’s held hostage to the data.