Strong US consumer spending, inflation readings put Fed in tough spot
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[May 27, 2023] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. 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-defense capital goods excluding aircraft, a
closely watched proxy for business spending plans.
The reports added to labor 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 U.S. 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."
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"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 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% last month after gaining 0.1% in March.
Economists polled by Reuters had forecast consumer spending, which
accounts for more than two-thirds of U.S. economic activity, would rise
0.4%.
Consumers stepped up purchases of new light trucks and spent more on
pharmaceutical products. Spending on goods rebounded 1.1% after two
straight monthly declines.
Services outlays increased 0.7%, lifted by gains in financial services
and insurance, healthcare, recreation, and housing and utilities.
Adjusting for inflation, consumer spending shot up 0.5% 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
labor market. Wages increased 0.5% after rising 0.3% in March. That
helped lift personal income 0.4% after a gain of 0.3% in March. Growth
estimates for the second quarter are currently as high as a 2.9%
annualized rate. The economy grew at a 1.3% pace in the first quarter.
Stocks on Wall Street were trading higher. The dollar edged up against a
basket of currencies. U.S. Treasury prices were mixed.
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IMPORTS SURGE
Strong demand was underscored by another report from the Commerce
Department showing imports of goods climbed 1.8% in April, mostly
reflecting motor vehicles and consumer goods. But the rising imports and
a 5.5% drop in exports caused the goods trade deficit to widen 17.0% to
$96.8 billion, a development that could subtract from growth this
quarter.
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![](../images/052723PIX/busine26.jpg)
A shopping cart is seen in a supermarket
in Manhattan, New York City, U.S., June 10, 2022. REUTERS/Andrew
Kelly/
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The current pace of consumer spending is, however, unlikely to be
sustained as Americans grow weary of inflation.
Government social benefits are also dwindling and most lower-income
households have depleted the savings accumulated during the COVID-19
pandemic. The saving rate fell to 4.1% in April from 4.5% in March.
Credit has also become more expensive following 500 basis points
worth of rate increases from the Fed since March 2022, when it
embarked on its fastest monetary policy tightening campaign since
the 1980s to tame inflation.
Banks are also tightening lending following recent financial market
turmoil spurred by the collapse of several U.S. lenders.
The personal consumption expenditures (PCE) price index increased
0.4% in April after rising 0.1% in March. In the 12 months through
April, the PCE price index increased 4.4% after advancing 4.2% in
March. Food prices were unchanged, while the cost of energy goods
and services jumped 0.7%.
Excluding the volatile food and energy components, the PCE price
index was up 0.4% after a 0.3% rise in March. The so-called core PCE
price index jumped 4.7% on a year-on-year basis in April after
gaining 4.6% in the 12 months through March. The Fed tracks the PCE
price indexes for its 2% inflation target.
Economists estimated that core services excluding housing, closely
watched by policymakers, increased 0.4% after rising 0.3% in March.
There was, however, some encouraging news for Fed officials.
Consumers' inflation expectations over the next 12 months dropped to
a final reading of 4.2% in May after spiking to 4.5% earlier in the
month, a survey from the University of Michigan showed. The
five-year inflation outlook eased to 3.1% from 3.2% in early May.
Financial markets saw a nearly 60% chance of the Fed raising its
policy rate by another 25 basis points at its June 13-14 meeting,
according to CME Group's FedWatch Tool. Much will, however, depend
on whether an agreement is reached to raise the government borrowing
cap. April's employment report next Friday as well as consumer price
data will also be crucial.
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"If the debt ceiling is resolved without too much damage to
sentiment, and banking troubles don't resurface, then the broad
sweep of data so far could make for an interesting debate at next
month's meeting, though we still believe the Fed will leave rates
unchanged," said Michael Feroli, chief U.S. economist at JPMorgan in
New York.
In another report, the Commerce Department said orders for
non-defense capital goods excluding aircraft surged 1.4% last month
after falling 0.6% in March, confounding economists who had expected
a 0.2% drop. Shipments of these so-called core capital goods
rebounded 0.5% after slipping 0.2% in March.
"This supports a pickup in business investment," said Kathy
Bostjancic, chief economist at Nationwide in New York.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul
Simao)
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