Other economic indicators suggest that the United States economy has rebounded nicely after a poor start to the year, but household spending remains fairly subdued and is set to contribute modestly to growth in the June quarter. Nevertheless, the Federal Reserve is set to continuing winding back its asset purchasing program when it meets in July.
In the United States, real personal consumption declined by 0.1 per cent in May, falling short of expectations, to be 1.9 per cent higher over the year. This followed a 0.2 per cent decline last month.
Household spending in April and May is 0.3 per cent higher than the March quarter average, suggesting that consumption will make only a modest contribution to growth in the June quarter. That result might strike you as a bit unusual – how can quarterly consumption rise if spending fell in both April and May?
It is worth remembering that spending in March was artificially high since many households delayed purchases in January and February due to poor weather. In March (and to a lesser extent April), many households were playing catch up. Quarterly growth is set to be positive simply because April and May were much stronger than January and February.
As a result, I’m not shocked that spending has slipped compared with March but it remains a disappointing result and suggests that the underlying momentum in the household sector is not as strong as many expected leading into this year.
The disaggregated data tends to reinforce that assessment and presents a thoroughly mixed view for the household sector. Spending on durables -- which were hit particularly hard by poor weather -- rose by 1.0 per cent in May but that result merely offset a similarly sized decline in April.
By comparison, consumption of non-durables fell by 0.3 per cent in the month, to be just 1.2 per cent higher over the year. Unlike spending on durable goods, non-durables received little boost in March as the poor weather subsided and is showing tentative signs that momentum has slowed. We cannot discount the possibility that this is simply a by-product of poor weather but it is a trend worth keeping an eye on.
Spending on services, which account for 66 per cent of consumption, fell by 0.2 per cent in May, to be 1.4 per cent higher over the year. Of the categories, services was the least hit by poor weather, which makes the May result particularly disappointing for the economy.
Real income growth can be extremely volatile, as per the graph above, but has been tracking a little stronger than spending over the past few months. As a result, the savings rate increased to 4.8 per cent in May, up from 4.1 per cent in December last year. This provides some modest upside for household spending in the months ahead.
Household activity feels somewhat at odds with the relatively strong growth in payrolls over the past few months. In fact, over the past eight years, there have only been three four-month periods with higher job creation.
More consistent with the labour market, is the latest information on inflation. The personal consumption expenditure deflator rose by 0.2 per cent in May, to be 1.8 per cent higher over the year.
The core PCE deflator (the Fed’s preferred measure of inflation) also climbed by 0.2 per cent in the month, to be 1.5 per cent higher over the year. It remains considerably below the Fed’s upper target of 2 per cent annual inflation but the recent pick-up, if maintained, may bring forward the Fed’s thinking regarding rates. Other measures of annual inflation are either at or around 2 per cent.
Spending activity in May was disappointing for an economy that, in other areas, has been showing signs of resilience. The job market continues to improve -- albeit at a moderate pace -- and on that basis I see some upside for the household sector over the remainder of 2014.
Poor weather has made interpreting recent months quite difficult but as a justification for poor data it is wearing a little thin. Most of the effects of the poor weather should have washed out of the system and from now on any weakness in household spending must surely reflect softer momentum.
Despite the poor data, the Fed is all but certain to continue reducing its asset purchases when they meet in late-July. Obviously a rate rise is not on the agenda. However, with inflationary pressures picking up a little, I wouldn’t be surprised if they bring forward their thinking on rates by a few months.