Economic Watch: Consumer Spending Jumps, Service Sector Declines
Economic Watch: American consumers opened their wallets a whole lot more in May, with consumer spending increasing the most in nearly six years.


American consumers opened their wallets a whole lot more in May, according to a new U.S. Commerce Department report, with consumer spending increasing the most in nearly six years.
The 0.9% increase from the month before, the biggest since April 2009, came as the government also upwardly revised April’s performance from no growth to a 0.1% gain.
On a three-month annualized basis, consumer spending is up 4%, on par with the pace at the end of last year.
The same report also showed a 0.5% increase in personal income for the second straight month, the best back-to-back monthly hikes since early 2014, while the personal savings rate fell to 5.1% from 5.4% in April.
Lindsey Piegza, chief economist at the investment banking firm Stifel, called it “a much more favorable picture of the U.S. consumer, as May spending surged relative to the lackluster pace over the first couple of months of the year. At this trajectory, if sustained, second quarter gross domestic product is positioned to outpace our sub-2% forecast.”
She cautioned that even with an above trend growth rate from April-June, coupled with an annualized 0.2% in the GDP across the first three months of the year, first half growth will remain a disappointment.
“After all, consumption is averaging just 0.2% over the past six months, meaning a more positive, but hardly impressive trend,” she said.
The Federal Reserve earlier hinted of a increase in interest rates this summer after being near zero percent for many years, however, the latest indication is that it is hoping for such a liftoff later this year.
A separate report on the service sector part of the economy was less encouraging.
The Flash U.S. Services Purchasing Managers Index from the financial information services information service provider Markit fell to 54.8 in June, from 56.2 in May, though still above the neutral 50 threshold for the 20th successive month.
The report highlighted a further moderation in new business growth from March’s recent peak. Anecdotal evidence suggested that improving domestic economic conditions continued to support new order volumes, although some firms noted a degree of caution among clients about the business outlook, according to Markit. Reflecting this, service providers signaled the least optimistic year-ahead outlook for business activity since March. The degree of confidence in June was also weaker than the average since the survey began in October 2009.
“The latest flash PMI surveys showed the smallest rise in service sector activity since January and the slowest growth of factory output for over a year and a half, linked to the strong dollar,” said Chris Williamson, chief economist at Markit. “With the exceptions of the weather-related slowdown at the turn of the year and the 2013 government shutdown, June saw the weakest pace of economic growth since May 2013.”
He said while this survey and one covering the U.S. manufacturing sector point to the economy growing at an annualized rate of around 3% in the second quarter as a whole, there has clearly been a loss of momentum in recent months.
“With June also seeing one of the smallest increases in new orders recorded over the past two years, the surveys suggest that GDP growth could slow appreciably in the third quarter,” Williamson said.
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