Solid US consumer spending pushes against hopes for hefty Fed rate cut

U.S. consumer spending increased solidly in July, suggesting the economy remained on firmer ground early in the third quarter and arguing against a half-percentage-point interest rate cut from the Federal Reserve next month.

The report from the Commerce Department on Friday also showed prices rising moderately last month, curbing inflation.

A jump in the unemployment rate to a near three-year high of 4.3% in July stoked fears of a recession, leading financial markets and some economists to put a 50-basis-points rate reduction on the table when the U.S. central bank embarks on a widely anticipated policy easing in September.

Fed Chair Jerome Powell last week signaled that a rate cut was imminent, in a nod to the worries over the labor market.

"There is nothing here to push the Fed to a half-point cut," said Conrad DeQuadros, senior economic advisor at Brean Capital. "This is not the kind of spending growth associated with recession."

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after advancing by an unrevised 0.3% in June, the Commerce Department's Bureau of Economic Analysis reported. The increase was in line with economists' expectations.

After adjusting for inflation, consumer spending gained 0.4% after rising 0.3% in June, and implied that spending retained the momentum from the second quarter, when it helped to boost gross domestic product growth to a 3.0% annualized rate.

The economy grew at a 1.4% pace in the January-March quarter. The Atlanta Fed raised its third-quarter GDP growth estimate to a 2.5% rate from a 2.0% pace.

The increase in spending was across both goods and services, with outlays on motor vehicles and parts leading the charge. Consumers also spent more on housing and utilities, food and beverages, recreation services as well as financial services and insurance. They also boosted spending on healthcare, visited restaurants and bars and stayed at hotels.

Consumers also bought more recreational goods and vehicles as well as furnishings and long-lasting household equipment.

While the labor market momentum has slowed, it continues to generate decent wage growth that is helping to underpin spending. The slowdown in the labor market is mostly driven by a step down in hiring rather than layoffs.

Personal income rose 0.3% last month after gaining 0.2% in June. Wages climbed 0.3% after increasing 0.2% in June.