U.S. Consumer Spending Highest in Almost 7 Years

Purchases of vehicles, higher gas prices boost 1% gain in April

Consumer spending in the U.S., which makes up for over two-thirds of U.S. economic activity, leaped 1% in April 2016, according to data from the U.S. Department of Commerce and as reported by Reuters on May 31st, 2016. The increase, which marks the biggest gain since almost seven years, or August 2009, was driven by purchases of new cars and higher gas prices, and beat expectations of a 0.7% rise. Adjusted for inflation, spending was up by 0.6% in April 2016.

Source: US Department of Commerce
Source: US Department of Commerce

The higher spending was driven by a 2.2% surge in purchase of durable goods, mostly motor vehicles. Spending on non-durable goods rose 0.7%, driven by clothing, food and petrol, according to data from the U.S. Bureau of Economic Analysis. Consumer spending, which started off at a sluggish pace at the beginning of 2016, has begun to pick up pace following a boost in household sentiment as a result of strong hiring, solid income growth, and higher household wealth from better equity and home prices.

According to U.S. government data, consumers are able to spend more because of new job creations over the past few years and income growth. Incomes rose by 0.4% for the third time in the first four months of 2016. On the other hand, U.S. consumers saved lesser during the month to fuel their purchases. Savings fell to $751.1 billion in April 2016 from $809.4 billion in March 2016. The savings rate fell to 5.4% in April 2016, after hitting a four-year high of 5.9% in March 2016.

In dollar terms, U.S. consumer spending increased to $11,384.20 billion in Q1 FY16, an all-time high, from $11,330.70 billion in Q4 FY15. The U.S. consumer spending averaged $5,198.63 billion from 1950 until 2016, according to the U.S. Bureau of Economic Analysis.

Source: US Bureau of Economic Analysis
Source: US Bureau of Economic Analysis

Inflation inches up

The strong U.S. consumption drove up inflation in April 2016. The personal consumption expenditures (PCE) price index, the Federal Reserve’s gauge to inflation rise or fall, rose 1.1% in the 12 months ended April 2016, up from 0.8% in March 2016. The core PCE index, excluding the food and energy categories, rose 0.2%. While the core PCE is still below the Fed’s 2% target rate, economists expect that inflation will continue to inch up in the coming months on account of the dollar’s declining rally and a gradual increase in oil prices and wages.

Higher spending strengthens case for Fed rate hike

Meanwhile, the higher consumer spending has strengthened the case for the Fed to consider an interest rate hike in the near future. The Fed will probably wait until inflation rises closer to 2% before it raises interest rates again. The Federal Reserve Chairperson, Janet Yellen, hinted at a hike in interest rates in the coming months following a slow and steady uptick in the U.S. economy on Friday, May 27th, 2016. The Fed Chair has earlier stated that it was appropriate for the Fed to gradually increase interest rates if the economy continues to improve.

U.S. home prices on the rise

The S&P/Case Shiller composite index of 20 metropolitan areas rose 5.4% in March 2016 on a Y-o-Y basis, beating estimates of a 5.2% rise. U.S. home prices rose on account of improving labor markets, falling jobless rates, low mortgage rates, and limited supply of homes in the market.

On a seasonally adjusted basis, home prices rose 0.9% in March 2016 compared to February 2016, against expectations of a 0.8% increase. On a non-seasonally adjusted basis, prices increased 0.9% from February 2016 versus expectations of a 0.5% increase.

While housing and consumer spending data have showed an uptick, gross domestic product in Q2 is well on its way to expand by 2.5%, according to the Atlanta Fed’s GDPNow gauge, compared to 0.5% growth in Q1. In the upcoming FOMC meeting to be held in Washington on June 14-15, Yellen and her colleagues will debate on the possibility of a second interest-rate hike following the rate increase in December 2015.

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