U.S. Consumer Spending Rebounds 1.8% Year-Over-Year, Driven by Service Sector Growth

Recent data from the U.S. Bureau of Labor Statistics (BLS) indicates that the U.S. consumer price index (CPI) for July rose by 0.2% on a month-over-month basis, in line with expectations. This modest increase reflects a slight easing in inflationary pressures, as the year-over-year CPI growth rate remained at 2.7%, unchanged from June. The core CPI, which excludes volatile food and energy prices, rose by 0.3% month-over-month, the largest increase since January. This was driven by higher prices for prescription drugs, software, and other goods sensitive to tariffs. The year-over-year core CPI growth rate increased to 3.1% from 2.9% in June, indicating that underlying inflationary pressures remain elevated.

The data suggests that while the overall inflation rate is stable, there are signs of increasing price pressures in certain sectors. The modest increase in the CPI and the larger-than-expected rise in the core CPI reflect the impact of tariffs on consumer prices, as well as the broader economic environment. The data also shows that the labor market remains tight, with unemployment rates holding steady and wage growth continuing to outpace inflation. This suggests that consumers have the purchasing power to support continued spending, which could drive further economic growth.

Despite recent data indicating a slowdown in the U.S. economy, a key report from the U.S. banking sector presents a contrasting picture. The latest credit card data from the U.S. banking sector shows an unexpected rebound in consumer spending in July, with total household credit card and debit card expenditures increasing by 1.8% year-over-year, marking a new high for the year. Specifically, seasonally adjusted household spending in July rose by 0.6% compared to the previous month, a significant increase from the 0.2% year-over-year growth seen in June.

This growth is broad-based, with contributions from both retail and service sectors, which had declined for three consecutive months. Notably, service sector spending increased by 0.9% month-over-month, the largest increase since April 2024, reversing recent weakness. Additionally, non-essential spending, which had slowed in June, showed signs of improvement in July. Spending on airlines and accommodation increased compared to June, while spending on dining and bars remained stable. Airport passenger traffic, which had been low in May and June, began to exceed 2024 levels starting in early July.

Based on these data points, the U.S. banking sector predicts that the upcoming July retail sales data (excluding automobiles) will show a 0.3% month-over-month increase. The "control group" sales data, which excludes automobiles, gasoline, building materials, and food services and better reflects core consumer demand, is expected to rise by 0.6%, surpassing market expectations. The report suggests that if this rebound is sustained, it could positively impact core consumer confidence indicators.

However, a critical question remains: how much of this growth is driven by genuine consumer spending versus inflationary effects from tariffs. Seasonal promotions and tariff concerns may be the primary drivers behind these figures. Online retailers' promotional activities, including extended "Prime Day" events, significantly boosted online retail sales. Additionally, back-to-school spending accelerated in July after a slow start in June. These event-driven consumption patterns may not be sustainable in the coming months.

Another factor to consider is the impact of tariffs. Data indicates that the dollar value of card spending in July increased more than the number of transactions, suggesting that retailers may be passing on existing or anticipated tariff costs to consumers. Some consumers may also be purchasing ahead of time to avoid future price increases due to tariffs.

While overall consumption data is positive, income disparities are becoming more pronounced. The number of households receiving unemployment benefits has increased significantly year-over-year. More concerning is the widening wage growth gap: low-income households' after-tax wage growth slowed to 1.3% year-over-year in July, while high-income households' wage growth accelerated to 3.2% for the third consecutive month, the largest gap since February 2021. This income disparity is reflected in consumption patterns. In July, low-income households' card spending remained flat year-over-year, while middle- and high-income households saw spending increases of 1.0% and 1.8%, respectively. Since May, high-income groups have outpaced low-income groups in spending, particularly in non-essential categories like airlines, accommodation, and entertainment.

Despite the challenges faced by low-income groups, the overall financial health of U.S. consumers appears robust, supporting a strong consumption outlook. From a macroeconomic perspective, the lowest 30% of income earners account for less than 15% of total U.S. consumption, meaning that stable spending by middle- and high-income groups can sustain overall consumption growth. Household savings levels remain above 2019 levels, both in nominal terms and after adjusting for inflation, and the rate of savings depletion has slowed. Credit card "borrowing capacity" data also shows positive signs, with the proportion of households carrying over credit card balances each month lower than pre-pandemic levels across all income groups. Although low-income households face some pressure, their monthly credit card balances relative to after-tax wages are not excessively high, partly due to strong wage growth across income groups in recent years. Additionally, the participation rate in hardship withdrawals from 401(k) retirement accounts remains low at 0.7%, indicating that consumers have not yet widely tapped into their emergency savings.