Spending on discretionary goods and services that people buy to have fun with was particularly motivated.

By Wolf Richter for WOLF STREET.

Adjusted for inflation, lots of inflation, consumer spending in August rose by 0.55% month-to-month and by 2.6% year-over-year, according to the Bureau of Economic Analysis today.

Americans have been out there spending despite soaring gasoline prices, AI-will-kill-us-all-mongering by AI companies, geopolitical chaos on the front pages… you name it, we have it – but no problem, the spending must go on, including or especially on discretionary experiences, such as restaurants meals and lodging, and on discretionary goods, such as recreational vehicles.

Not adjusted for inflation, consumer spending in August jumped by 0.86% from July, and by 6.1% year-over-year, to an annual rate of $22.3 trillion (red in the chart below).

These are big growth numbers, and we’ll see some bigger ones below, but there was a lot of inflation too. This is how an economy “is running hot” – lots of spending growth and lots of inflation.

Of the total amount spent:

• 69% got spent on services; half of that went to healthcare services (not including healthcare products) and housing combined.
• 11% got spent on durable goods, such as motor vehicles, recreational vehicles, computers, furniture, appliances, etc.
• 20% got spent on nondurable goods, such as pharmaceutical products, food, gasoline, clothing, footwear, household supplies, etc.

Food prices and gasoline prices are constantly in people’s faces, and when they rise, they piss people off, but they account for only a relatively small part of total consumer spending.

Spending on food and beverages at stores accounted for 7.0% of total consumer spending (dotted blue line). Gasoline and other energy goods accounted for 2.3% of total consumer spending, up from a share of 1.9% before prices began to spike (double green line). This relatively small share of total spending is in effect why the recent gasoline price spikes, and the 2021-2022 food and gasoline price spikes didn’t derail the economy.

About inflation adjustments: Price changes for each good and service that is in the consumer basket are tracked at that level, and spending on these goods and services is then adjusted for inflation by the price changes for those specific goods and services.

For example, if gasoline prices spike by 10%, “real” spending on gasoline is adjusted for 10% in price changes of gasoline. So, over time, gasoline sales adjusted for inflation are nearly flat, with seasonal variations and a slight downward trend, roughly paralleling gasoline consumption in gallons.

And if rents rise 2%, “real” spending on rents is adjusted for 2% in price changes.

Then the price changes for each product are combined and form the overall inflation rates.

So to see where people actually spend their money, we need to look at nominal spending, not adjusted for inflation.

Spending on services, not adjusted for inflation rose by 0.50% month to month and by 5.9% year-over-year in August.

Spending on services is dominated by housing, which accounts for 17.9% of total consumer spending, and by healthcare services (includes health insurance but not healthcare goods), which account for 17.3% of total spending.

Spending rose in:

• Housing and utilities: +0.26% monthly; +4.5% YoY (blue in the chart below).
• Healthcare services: +0.39% monthly; +6.8% YoY (red).
• Other services: +1.03% monthly; +4.9% YoY (double gold).
• Financial services and insurance (not including health insurance): +0.48% monthly; +7.6% YoY (big dotted green).
• Food services and accommodation: +1.31% monthly; +5.2% YoY (small dotted dark-blue).

Spending on nondurable goods spiked by 1.5% in August from July and by 5.9% year-over-year.

The big driver was gasoline due to the price spike. If the price spikes are taken into account, “real” spending on gasoline (adjusted for price changes of gasoline) declined month-to-month and year-over-year.

Pharmaceutical products and medicines dominate the “Other nondurable goods” category. In addition, this category includes games, toys, pet items, etc.; household supplies; personal care products; tobacco products; magazines, newspapers…

Spending rose in:

• Other nondurable goods (mostly medical goods): +1.45% monthly, +4.5% YoY (red)
• Food and beverages bought at stores: +0.74% monthly, +2.4% YoY (blue)
• Clothing and footwear: +1.5% monthly, +6.9% YoY (double gold)
• Gasoline: 4.3% monthly, +24% YoY (big dotted green).

Spending on durable goods spiked by 2.0% month-to-month and by 6.4% year-over-year, not adjusted for price changes.

“Recreational goods and vehicles,” the #2 category of durable goods, are what consumers buy to have a blast with. This is discretionary spending: ATVs, snowmobiles, motorhomes, travel trailers, dirt bikes; video, audio, and photographic equipment; computers, tablets, and software used for entertainment; bicycles; hunting, fishing, and camping equipment; musical instruments; recreational books; and other stuff.

Spending rose in:

• Motor vehicles & parts: +2.5% month-to-month, +7.3% YoY (red).
• Recreational goods and vehicles: +2.3% monthly, +8.8% YoY (blue).
• Furnishings and household equipment: +1.2% monthly; +5.9% YoY (double gold).
• Other durable goods: +1.3% monthly; +6.4% YoY (big dotted green).

These dizzying rates of consumer spending growth amid lots of inflation show that the economy is “running hot.” That trend is also visible among businesses, where massive amounts of investments are now getting plowed into infrastructure; for businesses, inflation, as measured by the PPI, has been substantially hotter than for consumers. And of course, federal government deficit-spending has been running hot for years.

This is a powerful mixture. And the bond market is seeing it too. The 10-year Treasury yield today rose to 5.30%, welcome back to the normal range, so to speak, highest since mid-2007, just before the Fed’s interest rate repression and QE began to systematically demolish the bond market.

In case you missed it: Not Even the Massive Changes of Methodology Can Get PCE Inflation Back into the Bottle

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: