WASHINGTON – U.S. consumer spending rose at the fastest pace in three months in June, providing momentum for the economy going into the second half of the year.
Consumer spending increased 0.4 per cent in June on a seasonally adjusted basis following slower increases of 0.3 per cent in May and 0.1 per cent in April, the Commerce Department said Friday.
That was the best showing since a 0.8 per cent surge in spending in March, which reflected a rebound after a harsh winter had kept consumers from the malls and auto showrooms.
Consumer spending is closely watched because it accounts for two-thirds of economic activity.
Americans saw earnings rise 0.4 per cent in June, matching the May increase. Income growth has lagged in this recovery but has shown recent signs of some acceleration.
Paul Dales, a senior U.S. economist at Capital Economics, said the strong gains in employment over the past six months should support stronger consumer spending in the second half of this year. He predicted that consumer spending will increase at an annual rate of 3 per cent in the next six months, an increase from a more modest 2.3 per cent average growth rate in spending over the last two years.
A key measure of inflation favoured by the Federal Reserve increased a modest 0.2 per cent in June, slightly below the 0.3 per cent May increase. Over the past 12 months, this measure of inflation is up 1.6 per cent, still below the Fed’s target of 2 per cent but above the lows of the past two years. Excluding food and energy, prices are up an even slower 1.5 per cent over the past 12 months.
The absence of inflationary pressures has given the Fed the leeway to focus on keeping interest rates at ultra-low levels to foster stronger job growth although this inflation gauge has moved up from the lows of the past two years.
In a separate report Friday, the Labor Department said that the economy created 209,000 jobs in July, the sixth straight month that job growth has been above 200,000.
Economists believe the stronger job will support stronger income gains in coming months, giving households the ability to boost their spending.
After a dismal winter caused the economy to shrink in the January-March quarter, the government reported this week that overall growth, as measured by the gross domestic product, surged at an annual rate of 4 per cent in the April-June quarter. Many analysts believe the current rebound will prove long-lasting and they are forecasting healthy growth of 3 per cent or better in the second half of this year and into 2015.
The stronger growth has prompted some economists to predict that the Fed will decide to start increasing a key short-term interest rate sooner than expected. Fed officials completed a two-day meeting this week with a decision to leave that rate unchanged at a record low near zero, where it has been since late 2008. The Fed said it planned to keep the rate at that level for a “considerable time” after it stops its monthly bond purchases.
Charles Plosser, president of the Fed’s Philadelphia regional bank, dissented from this action, and in a statement released Friday said he felt that given the strength already seen in the labour markets and the increase in inflation from last year’s low levels, it was no longer appropriate for the Fed to keep stating that it expected rates could remain low for a “considerable time” after the bond purchases end, which is expected to occur in October.
The report on spending showed that the gains were led by a 1 per cent rise in purchases of nondurable goods such as food and clothing. Spending on durable goods such as autos was up 0.5 per cent after an even bigger 1.2 per cent surge in May. Spending on services, the biggest spending category which covers things such as utilities, rent and health care, rose 0.2 per cent in June.
With income and spending both up at similar rates, the saving rate was unchanged in June at 5.3 per cent of after-tax income.
The biggest force contributing to the overall economic rebound in the spring was consumer spending, which grew at an annual rate of 2.5 per cent in the second quarter, more than double the sluggish 1.2 per cent growth rate during the first quarter.
That increase was supported by a burst of spending fueled by pent-up demand as shoppers picked up their spending after being kept away from the malls and auto dealerships by winter storms. Spending on durable goods jumped at a 14 per cent rate in the second quarter, reflecting the strong auto sales.