US consumers start to spend big again

shopping

The Times reports that spending by Americans grew by 0.9 per cent last month, official figures showed, the latest positive sign after a downturn in the first quarter of 2015.

The measure of consumer purchases of everything from cars to medical care — which represents two thirds of US economic activity — showed its biggest increase since August 2009. Spending growth of only 0.1 per cent was recorded in April.

The better than expected figures from the US Department of Commerce showed spending was boosted by demand for cars and other expensive items. Economists had predicted an increase of closer to 0.5 per cent in May.

Diane Swonk, chief economist at Mesirow Financial, said: “Hibernating consumers have woken from their winter slumbers with a strong appetite­for spending.”

She predicted that “consumer spending will remain buoyant this summer” and that US interest rates could rise as early as September as a result.

Other measures also suggested the US economy is picking up. Personal income, which includes workers’ salaries as well as state welfare, grew by 0.5 per cent for the second consecutive month.

Despite a modest rise in the number of first-time applications for unemployment welfare last week, the underlying trend suggests an improving jobs market. Claims for jobless benefits were below 300,000 for the 16th week.

US GDP contracted by 0.2 per cent in the first quarter of the year as businesses struggled to deal with a strong dollar, strikes at ports, spending cuts in the energy sector and a harsh winter.

However, economists expect this to be a short-lived downturn and for a solid return to growth in the second quarter, and the latest consumption figures will reinforce that view.

Even the manufacturing sector, which has been particularly hard hit by the strength of the US currency, is beginning to show signs of recovery.

The US economy is on track to expand by 2.1 per cent in the second quarter, according to the Atlanta Federal Reserve’s GDPNow forecast model. This was a little stronger than the regional Fed’s previous estimate on Tuesday of a 2.0 per cent rise. The latest data helped boost the model’s forecast on real consumption in the second quarter to 3 per cent from 2.9 per cent, the Atlanta Fed said on its website.

The American economy accounts for about a sixth of world output and is seen as a crucial engine of world growth as China slows and with most of Europe in the early stages of a fragile recovery.

The latest spending figures make it more likely that the country’s Federal Reserve, chaired by Janet Yellen, will opt to raise interest rates this year, which have been at almost zero since the onset of the financial crisis.

Spending on “long-lasting” goods such as cars rose by 2.2 per cent, while spending on services rose by a far more modest 0.3 per cent.

Adjusted to take inflation into account, consumer spending increased by 0.6 per cent last month, which represents the largest rise since August.

However, yesterday’s figures also showed that US inflation remained well below the Fed’s 2 per cent target for the 37th consecutive month, with improving consumer confidence not yet resulting in rising prices. Excluding food and energy, prices rose by 1.2 per cent in May compared with a year earlier.

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 271,000 for the week ended June 20. But it was the 16th successive week that claims had held below 300,000, a threshold usually associated with a firming labour market.