REFILE-WRAPUP 2 – U.S. economy kicks off second quarter on a strong note; inflation rises slow

U.S. consumer spending rose more-than-expected in April as households increased their purchases of goods and services and inflation growth slowed, which is likely to support economic growth in the second quarter amid heightened recession fears.

Other data from the Commerce Department on Friday showing the goods trade deficit narrowed sharply last month also boosted the economy’s near-term outlook. A record trade deficit caused output to contract in the first quarter.

“There will always be a turnaround in the economy, but at this stage of the economic cycle, consumers are still pulling out all the stops to stave off recessionary winds,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.9% last month. Data for March was revised up to show spending rising 1.4% instead of the 1.1% previously reported. While consumer confidence is at its lowest level since 2011, spending remains strong.

Spending on goods rose 0.8%, driven by new vehicles, clothing, footwear, recreational goods, and furniture and household equipment. Even though spending on services is picking up, demand for goods remains strong.

Spending on services rose 0.9% as consumers frequently dine out and travel. Spending on housing and utilities and recreational services also rose.

Economists polled by Reuters had forecast consumer spending to rise 0.7%. Large savings and strong wage growth supported spending, with companies scrambling to fill a record 11.5 million job openings at the end of March.

Personal income rose 0.4%, with wages accounting for most of the increase. The savings rate fell to 4.4% from 5.0% in March, the lowest level since September 2008. This shows that households have been tapping into the excess savings of more than $2 trillion accumulated during the COVID-19 pandemic.

Less savings could mean slower consumer spending going forward, especially given rising borrowing costs.

“High- and middle-income households still have some savings,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “Now the bottom quintile of households has tapped into what little excess reserves they have.”

The Federal Reserve’s hawkish monetary policy stance as it tries to quell high inflation and bring it back to its 2 percent target has sparked fears of a recession. Recession fears are also fueled by Russia’s protracted war against Ukraine and China’s zero COVID-19 policies, which further entangle supply chains.

The Fed has raised policy rates by 75 basis points since March. The Fed is expected to raise overnight rates by 0.5 percentage points at each meeting in June and July.

Strong consumer spending has provided some relief for risky assets like stocks after the recent sharp sell-off. Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. U.S. Treasury prices were mixed.

smaller trade gap

While consumer prices continued to rise in April, the magnitude was not the same as in recent months. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest gain since November 2020, after rising 0.9% in March.

In the 12 months through April, the PCE price index rose 6.3% after rising 6.6% in March.

Annual PCE price index gains are slowing as last year’s sharp increase was excluded from the calculation.

Excluding the more volatile food and energy components, the PCE price index rose 0.3%, the same increase for three straight months. The so-called core PCE price index rose 4.9% in April from a year earlier, the smallest gain since December, after rising 5.2% in March.

This is the second consecutive month that the annual core PCE price index growth has slowed. This measure of inflation is most closely watched by economists and policymakers.

“We need to see a more meaningful cooling of the monthly gains before the Fed can breathe,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.

Slowing inflation bodes well for GDP growth this quarter. Adjusted for inflation, consumer spending rose 0.7% in April after rising 0.5% the previous month.

In more commodity news, the Commerce Department’s second report showed the merchandise trade deficit fell 15.9% to $105.9 billion in April. The narrowing reflected a 5.0% drop in imports.

While weak imports are positive for GDP data, they could signal a slowdown in consumer spending and business investment. Both capital and consumer goods imports fell. However, car imports rose. Good exports rose 3.1%, driven by food shipments.

Wholesale inventories rose 2.1% last month, while retail inventories rose 0.7%. After Friday’s data, Goldman raised its second-quarter GDP growth forecast by two-tenths of a percentage point to an annualized rate of 2.8%.

The economy contracted at a 1.5% pace last quarter due to a large trade deficit and a slowdown in inventory buildup relative to the strong pace in the fourth quarter.

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