US consumer spending accelerates; weekly jobless claims fall

[WASHINGTON] US consumer spending increased more than expected in April, a further sign that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily.

Other data on Thursday showed a bigger-than-expected drop in the number of Americans filing applications for unemployment benefits last week. Moderately rising inflation and a tightening labor market bolster expectations that the Federal Reserve will raise interest rates next month.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 0.6 per cent last month, the biggest gain in five months, the Commerce Department said. That followed a 0.5 per cent increase in March.

Economists polled by Reuters had forecast consumer spending advancing 0.4 per cent. Spending was boosted by purchases of gasoline and other energy products. Nondurable goods purchases increased 0.9 per cent. There were also increases in purchases of long-lasting goods. Outlays on services rose 0.5 per cent, lifted by demand for household utilities.

Prices continued to gradually rise last month. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 0.2 per cent for the third straight month.

That left the year-on-year increase in the so-called core PCE price index at 1.8 per cent. The core PCE index is the Fed's preferred inflation measure. The US central bank has a 2 per cent inflation target.

Economists expect the annual core PCE price index will breach the Fed's target in the coming months. The Fed increased borrowing costs in March and has forecast at least two more rate hikes for this year.

US Treasury yields slipped after the data. US stock index futures were largely unchanged while the dollar was trading lower against a basket of currencies.

The moderate inflation also helped support consumer spending last month. When adjusted for inflation, consumer spending rose 0.4 per cent in April after increasing 0.5 per cent in the prior month. That suggests an acceleration in consumer spending after it grew at a 1.0 per cent annualized rate in the first quarter, the slowest pace in nearly five years.

The solid consumer spending added to data on trade and industrial production that have left economists anticipating a pickup in economic growth in the second quarter.

Gross domestic product estimates for the April-June period are above a 3.0 per cent rate. The economy grew at a 2.2 per cent pace in the first quarter.

Households dipped into their savings to fund purchases last month, with income growth remaining sluggish. Personal income rose 0.3 per cent after a gain of 0.2 per cent in March. Wages increased 0.4 per cent. Savings fell to US$419.6 billion last month from US$445.7 billion in March.

But with the labor market rapidly tightening, there is hope that wage growth will gain steam. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits dropped 13,000 to a seasonally adjusted 221,000 for the week ended May 26.

Economists polled by Reuters had forecast claims falling to 228,000 in the latest week. The labor market is viewed as being close to or at full employment. The jobless rate is near a 17-1/2-year low of 3.9 per cent, within striking distance of the Fed's forecast of 3.8 per cent by the end of this year.

Labor market strength is likely to be underscored by May's employment report, which is scheduled for release on Friday. According to a Reuters survey of economists, nonfarm payrolls probably increased by 188,000 jobs after rising by 164,000 jobs in April.

The Fed's latest Beige Book report of anecdotal information on business activity collected from contacts nationwide showed labor market conditions remained tight across the country in late April and early May.

The Fed said contacts continued to report difficulty filling positions across skill levels. There were notable shortages of truck drivers, sales personnel, carpenters, electricians, painters, and information technology professionals, the US central bank said in its report published on Wednesday.

REUTERS