U.S. consumer spending surged in April; inflation heats up

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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 labour market resilience, a rebound in factory production and pickup in business activity in suggesting that 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 next month.

Minutes of the Fed’s May 2-3 policy meeting, which were published on Wednesday, showed policy-makers “generally agreed” that 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 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. Data for March was revised up to show spending gaining 0.1 per cent instead of being unchanged as previously reported. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of U.S. 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 as well as health care, recreation and housing and utilities.

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 concentrated in January. Weakness in February and March set consumer spending on a lower 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 by 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 annualized rate. The economy grew at a 1.3 per cent pace in the first quarter.

U.S. stocks opened higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.

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 are believed to have depleted the savings accumulated during the COVID-19 pandemic. The saving rate fell to 4.1 per cent in April from 4.5 per cent 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 the recent financial market turmoil.

The personal consumption expenditures (PCE) price index increased 0.4 per cent in April after rising 0.1 per cent in March. In the 12 months through April, the PCE price index increased 4.4 per cent after advancing 4.2 per cent in March.

Excluding the volatile food and energy components, the PCE price index was up 0.4 per cent after a 0.3 per cent rise in March. The so-called core PCE price index climbed 4.7 per cent on a year-on-year basis in April after gaining 4.6 per cent in the 12 months through March. The Fed tracks the PCE price indexes for its 2 per cent inflation target.

Financial markets saw a nearly 60 per cent chance of the Fed raising its policy rate by another 25 basis points at the June 13-14 meeting, according to CME Group’s FedWatch Tool.

“With signs of accelerating inflation, strengthening consumption, and a strong labour market, the decision to pause could be pushed to July,” said Chris Low, chief economist at FHN Financial in New York.

In another report on Friday, the Commerce Department said orders for non-defense capital goods excluding aircraft surged 1.4 per cent last month after falling 0.6 per cent in March, confounding economists who had expected a 0.2 per cent drop.

Shipments of these so-called core capital goods rebounded 0.5 per cent after slipping 0.2 per cent in March. Core capital goods shipments are used to calculate equipment spending in the gross domestic product measurement.

Last month’s rebound in both orders and shipments raised cautious optimism that business spending on equipment would recover this quarter after posting back-to-back declines for the first time since 2020.