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  September 9th, 2016 | Written by

U.S. Consumer Spending Rises, Inventories Drop

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  • U.S. consumers and businesses seem to be moving in opposite directions.
  • While U.S. consumer spending surged, businesses were running down inventories.
  • Businesses cut back on product reorders and also reduced spending on equipment.

Consumers and businesses seemed to be moving in opposite directions according to U.S. economic numbers in the second quarter.

While consumer spending surged, businesses were content to focus on running down existing inventories, offsetting a positive trend and possibly impeding further progress.

As a result, however, third quarter numbers are trending upward, with higher demand for manufactured goods that will necessitate more business spending to restock. With unemployment stable and some economists suggesting the U.S. is approaching full employment statistically, consumer spending should remain strong, hopefully through the fourth quarter holiday season.


After-tax corporate profits dropped 2.4 percent in the second quarter after an increase of more than eight percent in the previous quarter. Inventories dropped by more than $12 billion—$4 billion more than previously reported. That was the first decline since the third quarter of 2011.

Businesses not only cut back on product reorders, they also reduced their spending on equipment. Weaker government outlays also held back growth, as it has for not just months but years.

But now that the U.S. is nearing the end of the third quarter, it appears the business-spending decline is already over. Demand for manufactured capital goods rose in July for a second straight month, and the overstock in warehouses has already begun to dissipate.

Disposable Income

Meanwhile, Americans are spending money. The consumer spending increase of 4.2 percent was upgraded to 4.4 percent, the fastest rise since the end of 2014. Observers attribute this in part to wages inching upward, and a longer-than-expected stabilization of gas prices.

So much consumer capital is ringing cash registers that figures on declining imports actually reversed. That, combined with a downward revision to exports, resulted in trade contributing one-tenth of a percentage point to second quarter GDP growth.