U.S. consumer spending paused in May as shortages hurt motor vehicle purchases, but the supply constraints and increased demand for services helped to lift prices, with the Federal Reserve’s main inflation measure rising by the most in 29 years.
There was, however, some good news on inflation. Consumers this month perceived higher inflation to be temporary, a survey showed on Friday, aligning with the views of Fed Chair Jerome Powell and Treasury Secretary Janet Yellen. Consumers’ inflation expectations are key as they can influence households’ behaviour.
With at least 150 million Americans fully vaccinated against COVID-19, which is allowing the economy to reopen and people to travel, dine out and engage in other activities that were restricted during the pandemic, consumer spending is expected to pick up in the coming months. Trillions of dollars in excess savings and rising household wealth due to gains in stock prices and home values are expected to provide a powerful tailwind.
“Spending growth will shift to services from goods, and drive a strong economic recovery throughout the rest of 2021 and all of 2022,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “The biggest drags are higher prices for some goods and services and shortages due to production bottlenecks.”
The unchanged reading in consumer spending, which accounts for more than two-thirds of U.S. economic activity, followed an upwardly revised 0.9 per cent jump in April, the Commerce Department said. Consumer spending was previously reported to have increased 0.5 per cent in April. Economists polled by Reuters had forecast consumer spending would rise 0.4 per cent in May.
Motor vehicles and some household appliances are scarce because of supply bottlenecks stemming from the pandemic. A global shortage of semiconductors is hampering motor vehicle production. Spending is also starting to shift back to the services part of the economy, which accounts for two-thirds of consumer spending, though the pace last month was insufficient to offset the drag from goods.
Spending on services rose 0.7 per cent, led by recreation, restaurants and hotels as well as housing and utilities. Spending on goods fell 1.3 per cent, with outlays of long-lasting goods like motor vehicles tumbling 2.8 per cent. Goods spending surged as the pandemic confined people to their homes.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 0.5 per cent after advancing 0.7 per cent in April. In the 12 months through May, the so-called core PCE price index shot up 3.4 per cent, the largest gain since April 1992. The core PCE price index rose 3.1 per cent on a year-on-year basis in April.
The core PCE price index is the Fed’s preferred inflation measure for its flexible 2 per cent target. Year-on-year inflation is accelerating in part as last spring’s weak readings drop from the calculation.
Stocks on Wall Street were trading largely higher, with the S&P 500 index hitting a record high as investors focused on the moderation in the monthly inflation reading. The dollar slipped against a basket of currencies. U.S. Treasury prices were mostly lower.
NO RUNAWAY INFLATION
Though the so-called base effects likely peaked in May, inflation will probably remain high in the near term because of the supply constraints and worker shortages, which are boosting wage growth.
“While we foresee increased inflation stickiness, with core PCE inflation hovering around 3.0 per cent in the second half (of the year), we don’t foresee runaway inflation,” said Lydia Boussour, lead U.S. economist at Oxford Economics in New York.
Consumers seem to agree. The University of Michigan consumer survey’s one-year inflation expectation dropped to 4.2 per cent in June from a decade-high 4.6 per cent in May. The survey noted that “consumers also believed that the price surges will mostly be temporary.”
The five-to-10-year inflation expectation fell to 2.8 per cent this month from 3.0 per cent in May. Fed officials put more emphasis on the five-to-10-year series.
Powell acknowledged this week that “inflation has increased notably in recent months,” but told lawmakers that the U.S. central bank “will not raise interest rates pre-emptively because we fear the possible onset of inflation.”
When adjusted for inflation, consumer spending fell 0.4 per cent last month after rising 0.3 per cent in April. Despite May’s drop in the so-called real consumer spending, consumption is running higher than its pace in the first quarter.
Gross domestic product growth estimates for this quarter are around a 9 per cent annualized rate, which would be an acceleration from the 6.4 per cent pace logged in the first quarter. Economists believe the economy could achieve growth of at least 7 per cent this year. That would be the fastest growth since 1984. The economy contracted 3.5 per cent in 2020, its worst performance in 74 years.
In addition to the supply squeeze, the ebbing boost from government stimulus checks likely restrained consumer spending last month. Transfer payments from the government dropped 11.7 per cent. That resulted in personal income falling 2.0 per cent after declining 13.1 per cent in April.
But there is ample fuel to drive spending. Wages gained 0.8 per cent after rising 1.0 per cent in April. The saving rate fell to a still-lofty 12.4 per cent from 14.5 per cent in April. Households accumulated at least $2.5-trillion in excess savings during the pandemic.
From July through December some households will receive income under the expanded Child Tax Credit program, which will soften the blow of an early termination of government-funded unemployment benefits in 26 states.
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