Consumer spending barely rises in May as federal stimulus money dries up

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The numbers: Americans have returned to more watchful spending habits now that most of the federal stimulus money is gone.

Consumer spending was basically flat last month, the government said Friday. Economists polled by MarketWatch had forecast a 0.4% increase.

The report was somewhat stronger than it looked, however, if the updated spending figures for April are taken into account. The increase in consumer spending in April was raised to 0.9% from 0.5%.

Consumer spending has also risen well above pre-pandemic levels and is growing more than enough to keep the economy humming. Household spending generates more than two-thirds of U.S. economic activity.

The level of spending last month also assures that gross domestic product in the second quarter will be very strong. Economists predict GDP increased 8.2% in the April-to-June period.

Incomes, as expected, fell for the second straight month. Virtually all of the decline stemmed from reduced government stimulus payments, however.

Big picture: The U.S. economy has largely recovered from a steep recession brought on by the pandemic. Most government restrictions have been removed, Americans are taking off their masks and consumers and businesses are going back to their precrisis ways.

The biggest change in spending is what people are spending on.

As the May report shows, they are devoting more of their money to services such as dining out, travel, vacations and recreation. They are spending somewhat less of their income on goods.

That’s a partial reversal of spending habits during the pandemic when many service-related activities were off limits.

Economists predict the U.S. will grow rapidly through the end of the year as more people go back to work and widespread shortages of labor and supplies ease.

Read: Business investment is growing at the fastest pace in decades

Key details: Americans increased spending last month on restaurants, hotels and recreation. The cut spending on goods such as new cars and trucks.

Incomes declined 2% last month, but not because companies are reducing pay. Federal stimulus payments have dried up and fewer people are collecting unemployment benefits.

Read: Unemployment claims barely fall and disappoint for second week in a row

What will help drive higher spending over the summer are rising pay, more employment and a high level of savings.

Many companies have had to raise wages and salaries to draw people back into the workforce or to keep current employees from leaving for other jobs. The number of people quitting rose in April to an all-time high, a sign that many workers think they find something better now.

The savings rate slipped to 12.4% in May, but it’s well above prepandemic levels. Many families either pocketed some of their stimulus money or they were able to save during the pandemic on expenses such as transportation, travel and clothes.

Perhaps the chief hindrance for most consumers is rising inflation — they’ll have to pay more for many goods and services.

A key measure of inflation known as the PCE rose 0.4% in May. Prices have surged 3.9% over the past year to mark the fastest pace since 2008.

Read: The U.S. economy is running ‘very hot’, IHS Markit finds, and so is inflation

Market reaction: The Dow Jones Industrial Average
and S&P 500
were set to open higher in Friday trades.

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Written by bourbiza

Bourbiza Mohamed. Writer and Political Discourse Analysis.


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