U.S. May Consumer Spending Rises 0.2%

Personal consumer expenditure (PCE) in May rose an expected 0.2% in the month following unchanged spending in April. This nominal increase was held back by price declines in the month because the volume of consumer spending increased by a stronger than expected 0.3%. The gain in consumer spending was helped by a 0.4% rise in personal income following a 0.5% rise in April (and expectations of a May gain of 0.5%). With incomes rising stronger than spending during the last two months, the savings rate has managed to climb to 4.0% in May from 3.8% in April and 3.3% in March.

The overall 0.2% increase in nominal PCE was led by strong gains in durables (0.8%) and services (0.5%). This gain was tempered by a 0.9% drop in spending on non-durables. A lion's share of the weakness in the latter component reflected price declines for gasoline because the volume of spending on non-durables fell a more modest 0.2%. This decline was offset by volume increases in the durables (1.1%) and services (0.3%) components.

On the inflation front, the 0.2% rise in the core PCE deflator, on a chain-weighted basis, was slightly stronger than the 0.1% increase expected going into the report; however, this still left the annual increase moderate at 1.3% although this is up from the 1.2% recorded in April. The overall PCE price measure was unchanged in the month and up 1.9% in the year.

The 0.3% rise in PCE on a volumes basis in May is encouraging and provides further confirmation that consumer spending continued to grow in the second quarter of 2010. In fact, today's report suggest a second-quarter annualized gain in consumer spending of 3.0% matching the increase recorded in the first quarter of the year. This gain is expected to help support overall GDP in the quarter. With some increased strength in government spending and residential investment, second-quarter GDP growth is projected to come in slightly above 3% relative to the 2.7% recorded in first quarter. Sustained positive growth points to the economy continuing to pull out of the recent recession; nevertheless, the pace of growth remains muted such as to provide only modest downward pressure on a still-high unemployment rate. This slack in labour markets along with the attendant downward pressure on inflation provides scope for the Fed to keep monetary conditions highly accommodative. Our forecast does not assume any hikes to Fed funds until the very end of 2010.

resource