Robust Consumer Spending Buoys Economic Growth Outlook

Consumer Spending
Alan Diaz/AP
By Lucia Mutikani

WASHINGTON -- Consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items, further evidence that economic growth was accelerating in the second quarter.

While other data on Thursday showed a modest increase in first-time applications for unemployment benefits last week, the underlying trend in jobless claims continued to suggest the labor market was tightening.

%VIRTUAL-pullquote-This portends well for second-quarter growth and the broader momentum of economic activity in the second half of the year...%The strengthening economy suggests the Federal Reserve could raise interest rates this year even as inflation remains well below the U.S. central bank's 2 percent target. Many economists expect a rate hike in September.

"This portends well for second-quarter growth and the broader momentum of economic activity in the second half of the year, and keeps the prospect of a September rate hike squarely on the table," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

The Commerce Department said consumer spending rose 0.9 percent last month, the biggest gain since August 2009, after a 0.1 percent rise in April.

May's sturdy increase in consumer spending, which accounts for more than two-thirds of U.S. economic activity, suggested households were finally spending some of the windfall from lower gasoline prices, and capped a month of solid economic reports.

It was the latest indication that growth was gaining momentum after gross domestic product shrank at a 0.2 percent annual rate in the first quarter, as the economy battled bad weather, port disruptions, a strong dollar and spending cuts in the energy sector.

From employment to the housing market, the economic data for May has been bullish. Even manufacturing, which is struggling with the lingering effects of dollar strength and lower energy prices, is starting to stabilize.

Though a report Thursday showed some cooling in services sector activity in June, businesses continued to view economic conditions as improving.

Economists had forecast consumer spending rising 0.7 percent last month.

U.S. stocks traded higher, with healthcare shares enjoying a broad rally after the U.S. Supreme Court issued a ruling upholding tax subsidies crucial to President Barack Obama's signature 2010 healthcare law.

Prices for longer-dated U.S. government debt fell, while the dollar was little changed against a basket of currencies.

Labor Market Tightening

Last month, spending on long-lasting manufactured goods such as automobiles jumped 2.2 percent and outlays on services like utilities rose 0.3 percent.

When adjusted for inflation, consumer spending increased 0.6 percent, the largest jump since last August, after being unchanged in April.

The rise in real consumer spending prompted economists at Barclays to bump up their second-quarter GDP estimate by 0.1 percentage point to a 3.1 percent annual rate.

Personal income increased 0.5 percent in May after a similar gain in the prior month. Income is being boosted by a tightening labor market, which is starting to push up wage growth.

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 271,000 for the week ended June 20.

But it was the 16th straight week that claims had held below 300,000, a threshold usually associated with a firming labor market. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell last week.

The strengthening jobs market could be bolstering confidence in the economy, encouraging households to tap into savings that have been boosted by lower gasoline prices.

The saving rate fell to 5.1 percent last month from 5.4 percent in April. Still, savings remain at lofty levels. That, together with rising wages, suggests more fuel for consumer spending for the rest of the year.

"The labor market is tight, wages and incomes are rising solidly, so we should expect consumers to help lead the economy forward," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the acceleration in consumer spending, inflation pressures remained tame last month. A price index for consumer spending increased 0.3 percent after being flat in April.

In the 12 months through May, the personal consumption expenditures price index rose only 0.2 percent.

Excluding food and energy, prices edged up 0.1 percent after a similar gain in April. The so-called core PCE price index rose 1.2 percent in the 12 months through May, the smallest gain since February 2014.

9 Numbers That'll Tell You How the Economy's Really Doing
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Robust Consumer Spending Buoys Economic Growth Outlook
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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