US Consumer Spending Rise Strongest In Over 6 Years

US Consumer Spending Rise Strongest In Over 6 Years
Washington: US consumer spending recorded its biggest increase in more than six years in April as households stepped up purchases of automobiles, suggesting an acceleration in economic growth that could persuade the Federal Reserve to raise interest rates soon.

Though other data on Tuesday showed an ebb in consumer confidence in May, spending is likely to remain supported by strong gains in house prices, as well as a strengthening labor market, which is steadily pushing up wages.

"This takes the Fed a step and a half closer to the next increase in interest rates," said John Ryding, chief economist at RDQ Economics in New York.

Federal Reserve Chair Janet Yellen said on Friday an interest rate hike would probably be appropriate in the "coming months", if the economy continued to pick up and the labour market added jobs. Her views were similar to those expressed in minutes from the Fed's April 26-27 policy meeting published recently.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, surged 1.0 per cent last month as households bought a range of goods and services.

Last month's increase was the largest since August 2009 and beat economists' expectations for a 0.7 per cent rise.

Strong consumption lifted inflation last month. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2 per cent after edging up 0.1 per cent in March. That left the increase in the year-on-year core PCE rate at 1.6 per cent.

The core PCE is the Fed's preferred inflation measure and is running below its 2 per cent target. Economists expect inflation to continue creeping higher this year, citing the dollar's fading rally and a gradual increase in oil prices and wages.

Financial markets are pricing in a roughly 61 per cent chance of an interest rate increase at the July 26-27 Fed policy meeting, according to CME FedWatch. The dollar was trading higher against a basket of currencies, while US stocks fell. Prices for U.S. government debt were little changed.

Brightening outlook

When adjusted for inflation, consumer spending shot up 0.6 per cent, the biggest gain since February 2014, after being flat in March.

The strong consumer spending report joined data on goods exports, industrial production, housing starts and home sales in suggesting the economy was regaining momentum after growing at a lackluster 0.8 per cent annualized rate in the first quarter.

The Atlanta Fed is currently forecasting gross domestic product rising at a 2.9 per cent rate in the second quarter.

The brightening economic outlook was dimmed somewhat by a separate report from the Conference Board showing its consumer confidence index slipped to 92.6 this month from a reading of 94.7 April.

Households also had a less favorable view of the labor market. The share of respondents saying jobs were "plentiful" was little unchanged at 24.3 per cent, while those reporting that jobs are "hard to get" increased to 24.4 per cent from 22.8 per cent in April.

Still, households continued to expect their incomes to increase.

In a third report, the Institute for Supply Management-Chicago said its business index fell 1.1 points to a reading of 49.3 in May, indicating a contraction in manufacturing activity in the Midwest. The decline mirrors other regional surveys and suggests national factory activity likely slumped in May after two straight months of growth.

Despite the retreat in consumer confidence and weakness in manufacturing, rising incomes and higher house price are likely to prop up consumption. A fourth report showed the S&P/Case Shiller composite home price index of 20 metropolitan areas rose 5.4 per cent in March from a year ago.

"Consumer spending will continue to lead economic growth in 2016, as more jobs, rising wages and house prices give households more money to spend," said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.

Last month, consumer spending was buoyed by a 2.3 per cent jump in purchases of long-lasting manufactured goods, with automobiles accounting for most of the increase. Purchases of nondurable goods surged 1.4 per cent and spending on services increased 0.6 per cent.

Personal income increased 0.4 per cent last month after rising by the same margin in March. Wages and salaries rose 0.5 per cent after advancing 0.4 per cent in March.

With spending outpacing income, savings fell to $751.1 billion last month from $809.4 billion in March.
© Thomson Reuters 2016

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