U.S. Consumers: In the Driver's Seat!

Personal spending surged 0.9 percent in May with real spending increasing 0.6 percent, giving a boost to Q2 personal consumption expenditures (PCE). Income rose another 0.5 percent for the month.

Personal Spending Recovers Handsomely

So much has been written about ‘how weak consumer spending’ has been
over the past several quarters, however, the 0.9 percent increase in spending in May is a timely reminder that U.S. consumers are in better shape than assumed. The biggest issue is that consumers are going to consume when they feel like consuming, not when analysts say they should. Perhaps May’s increase in PCE is just a reminder that consumers are in the driver’s seat. Furthermore, PCE was revised up from 0.0 percent in April to a slight positive of 0.1 percent. But perhaps the most important aspect of the report was the increase in real PCE, which came up 0.6 percent and will help boost growth of the U.S. economy during the second quarter of the year. There have been several news headlines over the last few months arguing that ‘there are no signs that U.S. consumers are coming back to the market.’ May’s results contradict those arguments.

PCE numbers for the first quarter were relatively soft, and the very weak reading for the first month of the second quarter made everybody believe that there was a mismatch between what was happening in the labor market, consumer confidence, and real income growth and what was happening with consumption. Perhaps this strong showing, both in nominal and real terms, will end the speculation that consumers are not taking advantage of all the positives in the economy.

Personal Income Remains Strong

Personal income growth remained strong in May, with a consecutive rate of growth of 0.5 percent in nominal terms. Nominal disposable personal income also increased 0.5 percent in May after growing 0.4 percent in April. However, real disposable personal income was up only 0.2 percent in May versus an increase of 0.4 percent in April, perhaps affected by the recent increase in inflation.

Wages and salaries increased $37.1 billion versus $21.6 billion in April with private wages making a big splash, increasing $34.8 billion in May versus only $19.4 billion in April.

Contribution to GDP Growth With Upside Risk

Although there is still one more month to go in the second quarter, the strong PCE print in May tends to indicate a better U.S. consumer during the second quarter than what many had envisioned before the release. This, together with yesterday’s upward revision to first quarter PCE, point to just the opposite of what many had argued for more than a quarter: that the U.S consumer was absent from the recovery. This result clearly shows otherwise.