US 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 yesterday showing a surprise rebound last month in orders of manufactured non-defence 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 US central bank would raise rates next month.
Minutes of the Fed’s May 2-3 policy meeting, which were published on Wednesday, showed policymakers “generally agreed” that the need for further rate increases “had become less certain.”
Consumer spending jumped 0.8 per cent last month. Data for March was revised up to show spending gaining 0.1pc instead of being unchanged as previously reported. Economists had forecast consumer spending, which accounts for more than two-thirds of US economic activity, would rise 0.4pc.
Consumers stepped up purchases of new light trucks and spent more on pharmaceutical products. Spending on goods rebounded 1.1pc after two straight monthly declines.
Services outlays increased 0.7pc, lifted by gains in financial services and insurance as well as healthcare, recreation and housing and utilities.
Consumer spending is being supported by strong wage gains in a tight labour market. Wages increased 0.5pc after rising 0.3pc in March. That helped lift personal income by 0.4pc after a gain of 0.3pc in March. Growth estimates for the second quarter are currently as high as a 2.9pc annualised rate. The economy grew at a 1.3pc pace in the first quarter.
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 4.1pc in April from 4.5pc 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 0.4pc in April after rising 0.1pc in March. In the 12 months through April, the PCE price index increased 4.4pc after advancing 4.2pc in March.
Excluding the volatile food and energy components, the PCE price index was up 0.4pc after a 0.3pc rise in March. The so-called core PCE price index climbed 4.7pc on a year-on-year basis in April after gaining 4.6pc in the 12 months through March. The Fed tracks the PCE price indexes for its 2pc inflation target.
In another report yesterday, the Commerce Department said orders for non-defence capital goods excluding aircraft surged 1.4pc last month after falling 0.6pc in March, confounding economists who had expected a 0.2pc drop.
Shipments of these so-called core capital goods rebounded 0.5pc after slipping 0.2pc 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.