The FINANCIAL — Americans boosted spending in May at the fastest rate in almost six years, the latest sign the economy is rebounding from a winter contraction, according to Nasdaq.
Personal spending, which measures what consumers spend on everything from cars to medical care, jumped a seasonally adjusted 0.9% from a month earlier, the Commerce Department said on June 25. That marked the biggest increase since August 2009. Spending rose 0.1% in April, a revision from the government’s initial estimate of no growth.
The boost came amid another healthy bump in Americans’ paychecks. Personal income, including wages and government aid, climbed 0.5% in May after rising at the same pace in April. That marked the best two-month increase in incomes since early 2014 and suggested a firming labor market is leading employers to slowly raise wages.
Economists surveyed by The Wall Street Journal had expected spending to grow 0.7% and incomes to rise 0.5%.
Meanwhile, consumer prices picked up last month, though annual inflation remained historically weak.
The combination of higher spending and incomes suggests the U.S. economy is returning to slow but steady growth after contracting in the first quarter. The nation’s gross domestic product fell at a 0.2% pace in January through March, the government reported earlier this week, as the strong dollar, a labor dispute at ports and brutal weather walloped businesses.
But the dip was likely temporary. A long run of job growth appears to be boosting household finances and spirits while also enabling merchants to charge slightly more for their products. Many private economists project that GDP will have grown at a pace of between 2% and 3% in the April-through-June period.
Consumer spending is the biggest driver of growth in the U.S., representing more than two-thirds of output. The pickup in consumer spending last month largely reflected Americans stepping up purchases of both nondurable and durable goods. Overall spending on goods rose 2% from April, while spending on services grew 0.3%.
Higher prices–particularly at service stations, with gasoline costs picking up after a nearly yearlong swoon– accounted for some of the increased household outlays. Adjusted for inflation, household spending increased 0.6% from April, the most since August 2014.
Americans also cut back on savings. The personal savings rate fell to 5.1% in May from 5.4% in April.
The latest figures are likely to reassure the Federal Reserve as it moves closer to raising short-term interest rates, which have been pinned near zero since the recession. The Fed has said it wants to see signs of economic growth returning to a steady pace before raising rates. Central bank officials have indicated a September increase is possible.
The outlook on inflation will be a key factor in the Fed’s decision. The central bank targets inflation of 2% a year as a sign the economy is growing healthily without stoking runaway inflation.
Thursday’s report showed the Fed’s favored inflation gauge remained below the 2% target for the 37th consecutive month. The price index for personal consumption expenditures grew 0.3% from April and 0.2% from May 2014. Core prices, which exclude food and energy costs, increased 0.1% from the prior month and 1.2% from a year earlier.
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