U.S. consumer spending increased more than expected in August, but a downward revision to July data kept intact expectations that economic growth slowed in the third quarter as a resurgence in COVID-19 infections curbed demand for services.

The Commerce Department said Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rebounded 0.8% in August, shrugging off declining motor vehicle sales caused by a global shortage of semiconductors, which is undercutting the production of automobiles.

Data for July was revised down to show spending dipping 0.1% instead of gaining 0.3% as previously reported. Economists polled by Reuters had forecast consumer spending increasing 0.6% in August. Spending was likely boosted by back-to-school shopping and child tax credit payments from the government.

Though spending is shifting back to services from goods, the flare-up in coronavirus cases in the summer, driven by the Delta variant, crimped demand for air travel and hotel accommodation as well as sales at restaurants and bars.

Services account for the bulk of consumer spending. Growth in consumer spending is expected to decelerate sharply in the third quarter and regain steam for the remainder of the year. Infections are trending down, which already is leading to a rise in demand for travel and other high-contact services.  

Consumer spending grew at a robust 12.0% annualized rate in the second quarter, accounting for much of the economy’s 6.7% growth pace, which raised the level of gross domestic product above its peak in the fourth quarter of 2019. Growth estimates for the third quarter are below a 5.0% rate.

“Consumer momentum should improve in the months ahead, driving the economy closer to a full post-pandemic recovery and keeping inflation hot,” said David Kelly, chief global strategist at JPMorgan Funds in New York.

Inflation maintained its upward trend in August. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, climbed 0.3% after increasing by the same margin in July.

In the 12 months through August, the so-called core PCE price index increased 3.6%, matching July’s gain.

The core PCE price index is the Federal Reserve’s preferred inflation measure for its flexible 2% target. The Fed last week upgraded its core PCE inflation projection for this year to 3.7% from 3.0% back in June.

The U.S. central bank said it would likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may follow more quickly than expected. Fed Chair Jerome Powell told lawmakers Thursday that he anticipated some relief from high inflation in the months ahead.
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