US consumer spending hits speed bump

WASHINGTON, July 01 (Reuters): US consumer spending fizzled in May as households cut back on purchases of new light trucks and other long-lasting manufactured goods amid higher borrowing costs, suggesting the economy lost some speed in the second quarter.
While the Commerce Department's report on Friday showed annual inflation rising last month at its slowest pace in more than two years, underlying price pressures remained too strong to discourage the Federal Reserve from returning to its strategy of raising interest rates in July, economists said. Inflation is by far still outpacing the US central bank's 2 per cent target.
The soft consumer spending took some shine off a raft of upbeat data on the labor and housing markets this month, which had painted a picture of a resilient economy.
"The recent stalling of consumer spending and somewhat better inflation news validate the Fed's decision to skip a meeting this month, though continued stickiness in core prices likely warrant another tap on the brakes in July," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
Consumer spending edged up 0.1 per cent last month. Data for April was revised lower to show spending accelerating 0.6 per cent instead of 0.8 per cent as previously reported. Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, rising 0.2 per cent.
Spending on goods, which are typically bought on credit dropped 0.5 per cent, with motor vehicle outlays plunging 23.3 per cent. Spending on gasoline and other energy goods tumbled 23.4 per cent. Goods spending increased 0.9 in April.
Outlays on services rose 0.4 per cent, lifted by healthcare, transportation, housing and utilities, as well as financial services and insurance. Services outlays gained 0.5 per cent in April.
When adjusted for inflation, consumer spending was unchanged. Data for April was revised lower to show the so-called real consumer spending rising only 0.2 per cent instead of 0.5 per cent as previously reported.
The stagnation in real consumer spending last month and the downward revision to April's data implied that consumer spending growth slowed to around a 1.0 per cent annualized rate in the second quarter, economists estimated, after rising at a 4.2 per cent rate in the January-March period, the fastest in nearly two years.
Robust consumer spending accounted for the economy's 2.0 per cent growth pace last quarter, defying fears of a recession because of the Fed's hefty rate hikes.
Nevertheless, the economy likely continued to chug along
this quarter, with job gains, housing starts, orders for durable goods all strong and the goods trade deficit narrowing in May.
Growth estimates for the second quarter range from as low as a 0.5 per cent rate to as high as a 2.3 per cent pace.
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury prices rose.
Consumer spending remains underpinned by strong wage gains in a tight labor market. Personal income rose 0.4 per cent last month, with wages increasing 0.5 per cent.
Slowing inflation is raising consumers' purchasing power, with real disposable income rebounding 0.3 per cent. The saving rate climbed to 4.6 per cent from 4.3 per cent in April, which could provide some cushion in the event of a recession.
But the outlook is less favorable. Most lower-income households are believed to have depleted savings accumulated during the Covid-19 pandemic.
The Supreme Court on Friday blocked President Joe Biden's plan to cancel $430 billion in student loan debt, which had been intended to benefit up to 43 million Americans.
"We've seen evidence that middle to lower income consumers are cutting back on discretionary spending," said Mike Graziano, consumer products senior analyst at RSM US in New York.
"Given the student loan relief plan was aimed at this customer cohort, any additional fixed monthly costs will result in additional financial pressure."
Meanwhile, US banks including JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley hiked their third-quarter dividends on Friday after sailing through the Federal Reserve's annual health check, which showed they have enough capital to weather a severe economic downturn.
JPMorgan, the biggest US lender, plans to increase its quarterly stock dividend to $1.05 per share from a current $1.00. Wells Fargo will boost its dividend to 35 cents a share from 30 cents, the companies said.
Goldman Sachs' dividend will rise to $2.75 a share from $2.50, while Morgan Stanley's will increase to 85 cents a share from the current 77.5 cents.
Citigroup's dividend will rise to 53 cents a share from 51 cents.
The banks announced the dividend hikes after passing the Fed's stress test, which determines how much capital they need to set aside before they can return money to shareholders.
Under the Fed's scenario of a major economic slump, the 23 banks tested - including JPMorgan, Bank of America and Goldman Sachs - would suffer a combined $541 billion in losses, while still holding more than twice the amount of capital required.