The U.S. consumer still appears in relatively good shape, according to recent economic data releases. For example, a new report from the Department of Commerce showed that personal income for Americans rose by 0.5 percent in April. That is better than the 0.3 percent gain analysts expected and the 37th increase in the past 38 months. Disposable personal income also improved in April and contributed to a better-than-forecast 0.3 percent gain in consumer spending. That is a healthy follow through in consumption after March’s upward revised 1.1 percent increase, the largest since 2009. However, year-over-year spending growth eased in May, but this is not too surprising given the recent trends in Americans’ credit utilization and personal saving. There was a slight uptick in inflation last month as well, which supports our earlier arguments that additional income growth will likely be needed to sustain consumption.
Another variable that will help determine whether spending growth picks up is consumer optimism, and fortunately recent measures have been quite encouraging. For example, the University of Michigan’s headline sentiment gauge rose to 100.0 in May, one of the best readings in the past 15 years, and The Conference Board’s consumer confidence index similarly jumped to 134.1 this month, significantly better than anticipated. Seeing these metrics climb to near-cycle highs is a welcome development because recent recessions have not started until several years after optimism peaked. The strong labor market continues to be the main driver of consumer sentiment, and respondents in The Conference Board’s survey this month expressed the greatest level of confidence in the availability of jobs in roughly two decades. There also remains a big gap between Americans’ opinions of present and future economic conditions. This suggests that consumers are aware of rising trade tensions and other issues, but such concerns have yet to dramatically weigh on sentiment. Moreover, any immediate potential hit to consumer spending that results from the latest escalation in the trade war could be contained to a diminished wealth effect if the selloff in the stock market worsens.
Sources: Econoday, U.S. DoC, UoM, The Conference Board, BIG, ZH, Bloomberg, FRBSL
Post author: Charles Couch