US consumer spending is rising sharply; rising inflation is slowing

  • Consumer spending increases 0.9% in April
  • Inflation-adjusted consumer spending rises 0.7%
  • Core PCE price index gains 0.3%; up 4.9% year-on-year
  • Merchandise trade deficit narrows 15.9% to $105.9 billion in April

WASHINGTON, May 27 (Reuters) – U.S. consumer spending rose more than expected in April as households increased purchases of goods and services and rising inflation slowed, which could support growth economy in the second quarter amid growing fears of a recession.

The short-term outlook for the economy was also brightened by other Commerce Department data on Friday, showing the merchandise trade deficit narrowed sharply last month. A record trade deficit led to a contraction in output in the first quarter.

“The economy may still turn on a dime, but at this point in the business cycle, consumers are still spending their hearts, keeping the winds of recession at bay,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

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Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.9% last month. Data for March has been revised up to show spending rose 1.4% instead of 1.1% as previously reported.

Consumers purchased more new motor vehicles, clothing, leisure items, and household furnishings and equipment. Demand for goods remains strong even as spending on services increases. Consumers also dined out, traveled and increased spending on housing and utilities.

Economists polled by Reuters had forecast consumer spending to rise 0.7%. Spending is supported by massive savings as well as strong wage increases as companies scramble to fill a record 11.5 million job vacancies at the end of March.

The Federal Reserve’s hawkish monetary policy stance as it struggles to stifle high inflation and bring it back to its 2% target has stoked fears of a recession, triggering a sell-off in stocks and a surge in stocks. US Treasury and dollar returns.

Fears of an economic slowdown have also been heightened by Russia’s drawn-out war on Ukraine as well as China’s zero COVID-19 policy, which have further entangled supply chains.

The US central bank has raised its key rate by 75 basis points since March. The Fed is expected to raise the key rate by half a percentage point at each of its next meetings in June and July.

SMALL GOODS TRADE GAP

Growth estimates for the second quarter are mostly above a 2.0 annualized rate. The economy contracted at a 1.5% pace in the January-March quarter, weighed down a record trade deficit and a slowdown in inventory accumulation from the robust rate in the fourth quarter.

But trade is unlikely to be a drag on GDP this quarter. In a second report, the Commerce Department said the merchandise trade deficit fell 15.9% to $105.9 billion in April. The narrowing reflects a 5.0% decline in imports. While lower imports are good for GDP, they could signal a slowdown in consumer spending and business investment.

Imports of capital and consumer goods fell. Imports of motor vehicles, however, increased. Good exports rose 3.1%, boosted by food shipments.

Although inflation continued to rise in April, it did not reach the same magnitude as in recent months. The personal consumption expenditure (PCE) price index rose 0.2%, the smallest gain in November 2020, after rising 0.9% in March.

In the 12 months to April, the PCE price index rose 6.3% after jumping 6.6% in March.

The annual increase in the PCE price index is slowing, as last year’s strong gains are no longer factored into the calculation.

Excluding the volatile components of food and energy, the PCE price index gained 0.3%, advancing by the same margin for three consecutive months. The so-called core PCE price index rose 4.9% year-on-year in April, the smallest gain since last December, after rising 5.2% in March.

It was the second month in a row that the rate of increase in the annual core PCE price index decelerated. This measure of inflation is the most followed by economists and policy makers.

“We need to see monthly increases cool off more significantly before the Fed can breathe,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.

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Reporting by Lucia Mutikani Editing by Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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