Buoyed by higher income, US consumers opened their wallets in May (+video)(Read article summary)
Consumer spending rose 0.9 percent in May and posted its biggest monthly increase since 2009, according to data released Thursday by the Commerce Department.
Americans’ spending heated up right along with the temperature to close out spring, hitting its fastest pace in six years last month.
Consumer spending rose 0.9 percent in May, surpassing analysts’ expectations and posting its biggest monthly increase since 2009, according to data released Thursday by the Commerce Department. Results for March and April were also revised upward, offering more evidence that winter’s spending slowdown was a cold-weather blip, not a yearlong trend.
“The first quarter [of 2015] was plagued with unseasonably colder winter weather, and the second quarter got off to a slow start in April,” IHS Global Insight economist Chris Christopher writes via e-mail. “However, this report indicates that there is some momentum building on the spending front.”
The pickup was fueled by a surge in auto sales and gas spending, as well as a sturdy gain salary and wages, which increased 0.5 percent for the second straight month. Vehicle sales are currently on pace to top 17 million in 2015, which would be their best performance since 2001.
Because Americans were spending more, the savings rate edged down slightly, from 5.4 percent in April to 5.1 percent in May. Despite the decrease, “we expect spending gains to lag income growth as an aging population seeks to boost retirement savings and also struggles with healthcare costs,” MFR, Inc. economist Joshua Shapiro writes in an e-mailed report.
Consumer spending makes up an estimated 70 percent of of US GDP, which contracted slightly in the first quarter of the year. For months, it looked like strong, consistent gains in the job market over the past year and a half, combined with more incremental rise in salaries and wages, weren’t prompting Americans to spend enough to help the economy grow. Instead, they were using that extra money to pay down debts or get their everyday expenses under control.
“Once the recovery took hold, we started to realize that the labor market improving was no guarantee that consumer demand would pick up the way we’re used to seeing,” Diane Lim, an economist with the Committee for Economic Development in Washington, told the Christian Science Monitor in April.
But spending has improved recently, suggesting that the correlation between the labor market and the consumer economy is growing stronger. “Fundamentals for the consumer have been strengthening with an improving labor market, and as long as the job market remains healthy, consumer spending growth ought to be better in the second half than…for the first half of the year,” Shapiro writes.
There are plenty of signs that the spending surge should continue in the coming months. Buoyed by better job prospects more pocket money, and persistently cheaper fuel, consumers have been more confident in recent weeks. Since the lack of spending and depressed wages were the chief holdups for the Federal Reserve and its decision on when to raise key long term interest rates, the promising consumer data could make it more likely for the Fed to raise rates in September.