Strong US consumer spending, inflation readings put Fed in tough spot

WASHINGTON – US consumer spending increased more than expected in April, boosting the economy’s growth prospects for the second quarter, and inflation picked up, which could prompt the Federal Reserve to raise interest rates again next month.

The growth picture was further brightened by other data from the Commerce Department on Friday showing a surprise rebound last month in orders of manufactured non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans.

The reports added to labour market resilience, a rebound in factory production and a pickup in business activity in suggesting the economy was experiencing a spring revival after hitting a speed bump in the first quarter. They also increased the chances that the US central bank would hike rates in June.

Minutes of the Fed’s May 2-3 policy meeting, which were published on Wednesday, showed policymakers “generally agreed” the need for further rate hikes “had become less certain.”

“Companies and consumers are in agreement that there are plenty of green shoots to like at the start of springtime and right now the economy is miles and miles away from the cliffs of recession,” said Mr Christopher Rupkey, chief economist at FWDBONDS in New York.

“Fed officials won’t be able to pause their rate hikes, it looks like demand is picking up, not slowing down as it is supposed to do when the Fed hikes rates.”

Consumer spending jumped 0.8 per cent last month after gaining 0.1 per cent in March. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, would rise 0.4 per cent.

Consumers stepped up purchases of new light trucks and spent more on pharmaceutical products. Spending on goods rebounded 1.1 per cent after two straight monthly declines.

Services outlays increased 0.7 per cent, lifted by gains in financial services and insurance, healthcare, recreation, and housing and utilities.

Adjusting for inflation, consumer spending shot up 0.5 per cent after being unchanged in March.

Last month’s surge in consumer spending tempered economists’ expectations for a sharp slowdown this quarter. Though consumer spending accelerated at its fastest pace in nearly two years in the first quarter, much of the growth was in January. Sluggishness in February and March set consumer spending on a slower growth trajectory heading into the second quarter.

Consumer spending is being supported by strong wage gains in a tight labour market. Wages increased 0.5 per cent after rising 0.3 per cent in March. That helped lift personal income 0.4 per cent after a gain of 0.3 per cent in March. Growth estimates for the second quarter are currently as high as a 2.9 per cent annualised rate. The economy grew at a 1.3 per cent pace in the first quarter.

Stocks on Wall Street were trading higher. The dollar edged up against a basket of currencies. US Treasury prices were mixed.

Imports surge

Strong demand was underscored by another report from the Commerce Department showing imports of goods climbed 1.8 per cent in April, mostly reflecting motor vehicles and consumer goods. But the rising imports and a 5.5 per cent drop in exports caused the goods trade deficit to widen 17 per cent to US$96.8 billion (S$130 billion), a development that could subtract from growth this quarter.

The current pace of consumer spending is, however, unlikely to be sustained as Americans grow weary of inflation.


Business Asia
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