New forecasts suggest US households eased up on spending in July even as income kept edging higher, while the inflation gauge the Federal Reserve watches most closely is expected to firm again.
Economists expect July's personal income to rise 0.2%, matching June's pace. But the building blocks look softer: job growth has cooled, the workweek is steady, and wage gains are expected to slow, which limits how much paychecks can keep lifting budgets.
At the same time, consumer spending is projected to rise just 0.1% in July, a noticeable slowdown from the 0.3% gain seen in June. That would mark the weakest month for outlays since early in the year, a sign that the pandemic-era spending spree is fading as savings dwindle and credit becomes more expensive.
What's behind the slowdown?
The pullback isn't surprising given the broader backdrop. Inflation has been running above the Fed's 2% target for years, and while it has cooled from its peaks, it remains sticky. Higher borrowing costs have made big-ticket purchases like cars and homes more expensive, and many households have already used up the extra savings they built during the pandemic.
Consumer confidence has also taken a hit. A recent survey showed US consumer confidence hitting a seven-month low as inflation worries persist. When people feel less secure about their finances, they tend to pull back on discretionary spending, which shows up in the data.
The labor market is another factor. Job growth has slowed from the red-hot pace of 2021 and 2022, and while layoffs remain low, wage increases are moderating. That means households have less extra cash to spend, even if they're still employed.
Core PCE inflation: the Fed's favorite gauge
The other key number in Friday's report is the core Personal Consumption Expenditures (PCE) price index, which strips out volatile food and energy prices. Economists expect it to rise 0.2% in July, matching June's increase. On an annual basis, core PCE is likely to hold around 2.6%—still above the Fed's 2% target but well below the 5%-plus readings seen in 2022.
Core PCE is the Fed's preferred inflation measure because it captures what consumers actually spend money on and is less distorted by supply shocks. A 0.2% monthly gain is roughly in line with what the Fed wants to see, but any upside surprise could reignite fears that inflation is stuck.
Fed officials have been clear they need more evidence that inflation is sustainably heading toward 2% before they cut rates. Boston Fed President Susan Collins recently warned that a rate hike may be needed if inflation stalls, underscoring how sensitive policymakers are to any sign of reacceleration.
What it means for investors
For everyday investors, this report is a mixed bag. On one hand, slower spending could ease inflationary pressures, which would give the Fed room to start cutting rates later this year. Lower rates tend to be good for stocks, especially growth and technology shares, and they also reduce borrowing costs for mortgages and credit cards.
On the other hand, a sharp slowdown in consumer spending could signal that the economy is losing momentum. Consumer spending accounts for about two-thirds of US economic activity, so if households stop opening their wallets, GDP growth could stall. That would be bad for corporate earnings and could trigger a market selloff.
The key is the balance. A modest cooling—like the one forecast for July—is probably the sweet spot: enough to keep inflation moving down without tipping the economy into recession. But if spending falls more than expected, investors may start pricing in a harder landing.
For now, markets are likely to take the data in stride, but the reaction could be sharper if the numbers come in well above or below expectations. The Fed's next policy meeting is in September, and this report will be one of the last major data points before officials decide whether to cut rates.
In the meantime, investors should watch how consumer-facing companies fare. If spending continues to slow, retailers and restaurants may start reporting weaker sales, which could weigh on their stocks. Conversely, companies that sell essentials or have pricing power may be more resilient.
Ultimately, Friday's report is a reminder that the economy is normalizing after a period of extraordinary stimulus. For investors, that means staying diversified and not overreacting to any single data point—but also being prepared for a market that could swing on the next inflation surprise.
