WASHINGTON, May 26 (Reuters) – US consumer spending rose more than expected in April, boosting growth prospects for the economy for the second quarter, and inflation picked up, which could prompt the Federal Reserve to raise interest rates next month again.
The growth picture was further brightened by other data released by the Commerce Department on Friday, which revealed that last month saw a surprising uptick in orders for non-defense manufactured capital goods excluding aircraft, a closely watched proxy for corporate spending plans.
The reports contributed to labor market resilience, a rebound in factory production and a rebound in business activity by suggesting the economy was experiencing a spring rebound after a speed bump in the first quarter. They also increased the likelihood that the US Federal Reserve would raise interest rates in June.
Minutes of the Fed’s May 2-3 policy meeting, released Wednesday, showed policymakers “generally agreed” that the need for further rate hikes had “become less certain.”
“Businesses and consumers agree that there are plenty of green shoots to love at the start of spring and that the economy is miles from the cliffs of recession right now,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Fed officials won’t be able to interrupt their rate hikes. It looks like demand is picking up, not slowing down, as it should when the Fed raises rates.”
Consumer spending rose 0.8% last month, following a 0.1% increase in March. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, to rise 0.4%.
Consumers bought more new light trucks and spent more on pharmaceuticals. Spending on goods recovered by 1.1% after two consecutive monthly declines.
Services spending rose 0.7%, driven by gains in financials and insurance, health care, recreation and housing, and utilities.
Adjusted for inflation, consumer spending rose 0.5% after remaining unchanged in March.
Last month’s surge in consumer spending tempered economists’ expectations for a sharp slowdown this quarter. While consumer spending accelerated at its fastest pace in nearly two years in the first quarter, much of the growth took place in January. The sluggishness in February and March led to slower growth in consumer spending ahead of the second quarter.
Consumer spending is supported by strong wage increases in a tight labor market. Wages rose by 0.5% after an increase of 0.3% in March. That helped boost personal income by 0.4% after a 0.3% gain in March. Growth estimates for the second quarter are currently as high as 2.9% year on year. The economy grew by 1.3% in the first quarter.
Stocks on Wall Street were trading higher. The dollar moved up against a basket of currencies. US Treasury bond prices were mixed.
INPUT SWING
[1/2] A shopping cart is seen inside a supermarket in Manhattan, New York City, U.S., June 10, 2022. REUTERS/Andrew Kelly/
The strong demand was underlined by another report from the Department of Commerce, which shows that imports of goods rose 1.8% in April, mainly due to motor vehicles and consumer goods. But rising imports and a 5.5% fall in exports pushed the goods trade deficit up 17.0% to $96.8 billion, a development that could weigh on growth this quarter.
However, the current pace of consumer spending is unlikely to be sustained as Americans grow weary of inflation.
Government social benefits are also shrinking and most lower-income households have exhausted their savings accumulated during the COVID-19 pandemic. The savings rate fell from 4.5% in March to 4.1% in April.
Credit has also become more expensive following 500 basis point rate hikes by the Fed since March 2022, as it embarked on its fastest monetary tightening campaign since the 1980s to curb inflation.
Banks are also tightening their lending following the recent financial market turmoil, spurred by the collapse of several US lenders.
The personal consumption price index (PCE) rose 0.4% in April, following a 0.1% increase in March. In the 12 months through April, the PCE price index rose 4.4% after rising 4.2% in March. Food prices remained unchanged, while the cost of energy goods and services increased by 0.7%.
Excluding the volatile food and energy components, the PCE price index rose 0.4% after rising 0.3% in March. The so-called core PCE price index rose 4.7% year-on-year in April, after rising 4.6% in the 12 months through March. The Fed tracks PCE price indices for its 2% inflation target.
Economists estimate that core services excluding housing, closely watched by policymakers, are up 0.4% after rising 0.3% in March.
However, there was some encouraging news for Fed officials. Consumer inflation expectations for the next 12 months fell to a closing reading of 4.2% in May, after rising to 4.5% earlier in the month, a University of Michigan study found. The five-year inflation outlook eased to 3.1% from 3.2% in early May.
Financial markets saw a nearly 60% chance that the Fed would raise its key rate by another 25 basis points at its June 13-14 meeting, according to the CME Group’s FedWatch Tool. However, much will depend on whether an agreement is reached on raising the government’s funding ceiling. The April employment report next Friday and consumer price data will also be crucial.
“If the debt ceiling is resolved without doing too much damage to sentiment, and banking problems don’t resurface, the wide range of data so far could make for an interesting debate at next month’s meeting, although we still believe the Fed will leave interest rates.” unchanged,” said Michael Feroli, chief US economist at JPMorgan in New York.
In another report, the Commerce Department said orders for non-defense capital goods, excluding aircraft, rose 1.4% last month after falling 0.6% in March, confusing economists who predicted a 0.6% drop. .2% expected. Shipments of these so-called core capital goods rebounded 0.5% after falling 0.2% in March.
“This supports an increase in business investment,” said Kathy Bostjancic, chief economist at Nationwide in New York.
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama and Paul Simao