Economic Watch: Consumer Spending Fueling Better Overall Growth

One of the biggest drivers of the U.S. economy increased for the second straight month in May, adding to optimism that growth in the second quarter will be better than the slow first quarter pace.

According to a new Commerce Department report, consumer spending, which accounts for around two-thirds of all U.S. economic activity, hit market expectations as it increased 0.4% from the month before, following a 1.1% upwardly revised surge in April.

Spending in durable goods, those designed to last three years or more, moved 0.6% higher while nondurable spending increased 0.5%.

With an increase in May and upward revision to April, the volume of personal consumption expenditures moved closer to a 4% annualized rate and would represent a significant bounce-back following the 1.5% first-quarter gain that marked the smallest quarterly increase in two years, according to RBC Economics.

The slow pace of consumer spending in the first quarter also restrained overall economic growth, with the Commerce Department saying on Tuesday the nation’s gross domestic product increased at a paltry 1.1% annual rate, but better than the previous reading of a 0.8% annual hike. Following the release of the May consumer spending report, the multinational financial services firm Barclays raised its estimate for second quarter GDP annual growth from 2.5% to 2.8%, according to the Wall Street Journal.

The report also showed personal incomes in May increased 0.2% from the month before, after advancing 0.5% in April, while the personal savings rate of 5.3% is the lowest of the year.

“Real disposable income growth has slowed somewhat to date in the second quarter, but it remains a relatively solid 2% annualized in the second quarter to date relative to the first quarter, and up 3.2% on a year-over-year basis in May," says Nathan Janzen, Senior Economist at RBC, "as partial offset to slower employment growth in recent months has come from real wage gains."

He notes that financial market volatility emerging from last week’s "Brexit" vote in the U.K. could weigh on U.S. consumer confidence going forward, but with the help of the strength of the U.S. dollar, it also could give an already cautious Federal Reserve another reason to delay further interest rate hikes.

“The combination of a solid household income backdrop and potentially lower for longer interest rates sets up household spending to remain a key driver of gross domestic product growth going forward,” Janzen said.