Consumer Spending Rises

Overview: Over the past week, economic reports revealed that consumer spending remained solid and inflation was stronger than expected. As a result, mortgage rates ended the week a bit higher.

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Consumer spending represents over two-thirds of U.S. economic activity, making it an important indicator of the strength of the economy. While many economists have been predicting that consumers will scale back their spending due to economic uncertainty, this has not happened so far. Retail sales in July rose 0.5% from June, matching the consensus forecast, and they were a substantial 3.9% higher than a year ago. The strongest retail categories included motor vehicles, home furnishings, and apparel.

Last week, the key Consumer Price Index (CPI) report was very close to expectations, causing investors to breathe a sigh of relief on the inflation front. However, another significant inflation indicator released over the past week, the Producer Price Index (PPI), which measures costs for producers, came in far above the expected levels. The July core PPI surged a massive 0.9% from June, while the consensus forecast was for an increase of just 0.3%. This was the largest monthly increase since June 2022. Core PPI was 3.7% higher than a year ago, up from an annual rate of 2.6% last month and the highest level since March. Investors tend to place less weight on PPI than CPI, since it reflects a smaller portion of the economy. They will be watching closely to see how much upward pressure higher tariffs will place on inflation levels.

The latest home building data revealed mixed news. After falling to the lowest level in five years in May, overall housing starts rose 5% from June to July, far above the consensus forecast — and the highest level in five months. However, the strength was mostly due to volatile multi-family units, which jumped 10%. Single-family starts rose a more modest 3% from June and were 8% higher than a year ago. Single-family building permits, a leading indicator of future construction, dropped for the fifth straight month to the lowest level since June 2020. A separate survey of home builder sentiment on housing market conditions from the National Association of Home Builders (NAHB) unexpectedly fell to the lowest level since 2022. Builders reported that elevated mortgage rates, weak buyer traffic, and rising costs remained the primary obstacles to a faster pace of construction.

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Retail Sales (% change)

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Week Ahead

Aug. 21

Existing-Home Sales report

Aug. 22

Fed Chair Jerome Powell to give speech at Jackson Hole

Aug. 25

New-Home Sales report

Aug. 26

Consumer Confidence Index