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US economy off to strong start in second quarter

WASHINGTON: US consumer spending rose more than expected in April as households boosted purchases of goods and services, and the increase in inflation slowed, which could underpin economic growth in the second quarter amid rising fears of a recession.

The economy’s near-term prospects were also brightened by other data from the Commerce Department yesterday showing the goods trade deficit narrowed sharply last month. A record trade deficit caused a contraction in output in the first quarter.

“The economy can always turn on a dime, but at this point in the economic cycle, consumers are still spending their hearts out, keeping the recessionary winds at bay,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.9 per cent last month. Data for March was revised higher to show outlays racing 1.4pc instead of 1.1pc as previously reported. The strength in spending is despite consumer sentiment being at its lowest level since 2011.

Goods spending increased a solid 0.8pc, driven by new motor vehicles, clothing, footwear, recreational goods as well as furnishings and household equipment. Demand for goods remains strong even as spending on services is picking up.

Services outlays rose 0.9pc as consumers frequently dined out and travelled. There was also increased spending on housing and utilities, and recreation services.

Economists polled by Reuters had forecast consumer spending gaining 0.7pc. Spending is being supported by massive savings as well as strong wage gains, with companies scrambling to fill a record 11.5 million job openings as of the end of March.

Personal income rose 0.4pc, with wages accounting for the bulk of the increase. The saving rate dropped to 4.4pc, the lowest since September 2008, from 5.0pc in March. That suggests households have been tapping into the more than $2 trillion in excess savings accumulated during the Covid-19 pandemic.

The reduction in savings could mean slower consumer spending down the road, especially given the rising borrowing costs.

“High-and middle-income households still have some savings amassed,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Households in the bottom quintile have now tapped what little they had in excess reserves.”

The Federal Reserve’s hawkish monetary policy stance as it fights to quell high inflation and bring it back to its 2pc target has fanned worries of a recession. Fears of an economic downturn have also been exacerbated by Russia’s dragging war against Ukraine as well as China’s zero Covid-19 policy, which have further entangled supply chains.

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

Strong consumer spending offered some reprieve for risky assets like equities after a recent sharp sell-off. Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. US Treasury prices were mixed.

Although inflation continued to increase in April, it was not at the same magnitude as in recent months. The personal consumption expenditures (PCE) price index rose 0.2pc, the smallest gain November 2020, after shooting up 0.9pc in March.

In the 12 months through April, the PCE price index advanced 6.3pc after jumping 6.6pc in March.

The annual PCE price index increase is slowing as last year’s large gains drop out of the calculation.

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

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

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