U.S. consumer spending surged last month as shoppers benefited from a growth in pay even as persistent inflation and rising interest rates squeezed pockets. Personal consumption, adjusted for inflation, increased 0.5% in April from a flat reading in March, as spending on services such as insurance and healthcare picked. Consumers pushed up their spending on goods, buying big-ticket items such as a new car as well as essentials such as pharmaceutical products, computers, gasoline, and clothing. The increase in spending was supported by a 0.4% increase in personal income that was driven by a jump in private wages and salaries.
Consumer Spending Data
Source: Bureau of Economic Analysis
Consumer spending is a metric that the Federal Reserve assesses closely to make its decision about monetary policy; especially interest rates. April’s consumer spending was much higher than the 0.1% rise the previous month. Measured year over year, prices increased 4.4% in April, up from 4.2% in March. The year-over-year figure is down sharply from a 7% peak last June but remains far above the Fed’s 2% target. Friday’s report from the government also showed that despite rising prices, consumers remain buoyant.
Despite long predictions of a forthcoming recession, Friday’s data underscored the U.S. economy’s surprising resilience. Consumer spending, which drives most of the U.S. economy, has been bolstered by solid job gains and pay increases. The economy, which grew at a sluggish 1.3% annual rate from January through March, is projected to accelerate to a 2% pace in the current April-June quarter. This now begs the question to know what would the Fed do in June?
It is clear that the release of this data will impact the Fed’s decision on interest rates. Let us remember that during his last meeting in early May, Jerome Powell asserted that while it is likely that interest rates will be paused, this decision though will be based on data assessment. If the data show a surge in consumer spending, then the option to hike rates again will probably be implemented. In fact, a vocal group among the Fed’s 18-member interest-rate setting committee has pushed for more rate hikes later this year on the grounds that inflation isn’t slowing fast enough. Michael Gapen, the U.S. economist at Bank of America Securities, said about rate hikes:
“Inflation is too sticky for the Fed to commit to an extended pause. Even if the Fed skips June, it will keep July in play.”
Some economists foresee inflation easing in the coming months. Omair Sharif, founder of Inflation Insights, noted that a few pricing quirks fueled April’s bigger-than-expected rise in core prices and said he believed they won’t likely persist.
The Fed’s ultimate goal is to make borrowing costlier for consumers and businesses and thereby reduce spending, growth, and inflation. Its rate increases have led to a more than doubling of mortgage rates and elevated the costs of auto loans, credit card borrowing, and business loans. They have also heightened the risk of a recession, which most economists predict will begin sometime this year. A Federal Reserve report found that, on average, inflation has outstripped those wage increases and left many people worse off. At the end of last year, just below three-quarters of Americans said they were “doing okay” financially or living comfortably. That marked a drop of 5 percentage points from the previous year and was among the lowest such levels measured since the survey started in 2016.