Consumer spending sees best increase in 5 months
WASHINGTON – Americans boosted their spending by 0.6 percent in April, the biggest increase in five months and a strong indication that the economy is reviving after a winter slowdown.
The Commerce Department said Thursday that last month’s increase in consumer spending was the largest increase since a 0.7 percent rise last November.
The better-than-expected April gain, which followed a strong 0.5 percent March increase, caused some economists to boost expectations for economic growth, as measured by the gross domestic product, in the April-June quarter.
“The first two months of the year were downers on the consumer spending front, but spending came back to life in March and April despite rising gasoline pump prices,” said Chris G. Christopher Jr., senior economist at IHS Market.
He said his forecast for second quarter economic growth, is now at 4 percent. That would be the strongest quarterly growth in four years and a significant rebound from a modest 2.3 percent gain in the first quarter.
An inflation measure closely watched by the Fed rose by 2 percent in April, compared with a year ago, the second month it has achieved the Fed’s target for inflation after years of chronically low inflation.
The Fed seeks to manage the economy to achieve moderate annual gains in inflation of around 2 percent. However, for the past six years it has failed to achieve that goal as the fallout from the country’s worst recession in seven decades depressed wages and made it hard for businesses to raise prices.
Now that inflation is finally rising to the Fed’s target level, the expectation is that the central bank will continue to gradually raise its benchmark interest rate to make sure the economy does not overheat. The Fed is expected to boost rates for a second time this year when it meets in June.
Meanwhile, the Labor Department reported Thursday that the number of Americans filing applications for unemployment benefits dropped by 13,000 last week to 221,000. Jobless claims, a proxy for layoffs, have been below 300,000 for more than three years, evidence of the strength in the labor market.
The government will release its report on May employment on Friday. Unemployment fell to a 17-year low of 3.9 percent in April.
The 0.6 percent rise in consumer spending reflected a 0.3 percent increase in purchases of durable goods such as cars and a 0.9 percent jump in spending on non-durable goods, an increase that was heavily influenced by the recent rise in gasoline prices.
Consumer spending is closely watched since it accounts for 70 percent of economic activity. The 2.3 percent GDP growth in the January-March quarter was a significant slowdown from growth rates around 3 percent in the previous three quarters. However, economists believe with consumer spending on the rebound, GDP growth is poised to accelerate.
“Consumers are spending more but saving less, which is nice for now but raises questions about the future,” said Joel Naroff, chief economist at Naroff Economic Advisors. He said the spending gains in April probably were helped by the $1.5 trillion tax cut plan that took effect in January, with the boost in take-home pay helping to offset the rise in gas prices.
Incomes rose by 0.3 percent in April while after-tax incomes rose an even stronger 0.4 percent, the best showing since January.
But with spending growing faster than incomes, the saving rate slipped to 2.8 percent of after-tax incomes in April, down from 3 percent in March and the lowest level since a 2.4 percent saving rate in December.