Consumer Spending

June 29th, 2016 9:19 am | by John Jansen |

Via TDSecurities:

US: Consumer Spending Back on Track – For Now

·         Personal spending rose at a very respectable 0.4% m/m pace in May, coming on the heels of the upwardly revised 1.1% m/m surge the month before.

·         The inflation picture, however, remained relatively benign with core inflation unchanged at 1.6% y/y.

·         The strong spending performance puts the current tracking for Q2 GDP north of 3.0%, though the eruption of global anxiety could act as a brake on spending going forward.

·         This will have no implication for Fed policy.

Personal consumption expenditures rose at a very robust 0.4% m/m pace in May, which was broadly in line with the consensus expectation. The increase in spending activity, however, comes on the heels of the upwardly revised 1.1% m/m surge the month before, suggesting a strong rebound in spending momentum. Real spending was also quite strong, gaining a further 0.3% m/m following an upwardly revised 0.8% m/m advance the month before, signaling a fairly buoyant 5.0% performance in personal consumption expenditures this quarter. From a GDP accounting perspective, this spending report suggests a fairly strong rebound in economic growth momentum, with GDP growth expected to surge to 3.0% or better.

With income rising at a relatively modest pace (as personal disposable income rose 0.2% m/m), the rise in spending was underpinned by a further drawdown in savings, pushing the saving rate down to 5.3% m/m from 5.4%. Real disposable income advanced at a slightly more modest 0.1% m/m pace, marking the slowest pace of advanced in this indicator since March last year. On the inflation front, the story was somewhat less encouraging, with the core PCE index rising at a fairly subdued 0.2% m/m pace (up 0.162% at 3 decimal places), keeping the annual pace of core inflation unchanged at 1.6% y/y. The headline PCE index also rose at a 0.2% m/m pace, though the annual pace of headline PCE inflation decelerated to 0.9% y/y from 1.1% y/y.

The overall tone of this report was unambiguously positive, and the upbeat spending performance suggests that personal consumption activity might be back on track following the missteps earlier this year, and it points to a very strong GDP growth rebound this quarter. Nevertheless, with the confidence-sapping eruption in global financial market activity continuing to play out, we expect spending momentum to slow markedly in the coming months adding a layer of uncertainty to the US economic outlook going forward. In that regard, this report will be seen by the Fed as offering a very encouraging rear-view look on US economic performance, but providing no guidance on what to expect going forward. We continue to expect the Fed to remain on hold until mid-2017.

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