Consumer Spending Fell Flat in May After Robust Spring
Consumer spending in the United States stayed flat in May, according to data released by the Commerce Department on Friday. But the details underlying the report point to a strong summer season for retailers, the travel industry and entertainment venues, as consumers pivot away from spending on furniture and home office equipment and toward restaurant meals and vacations.
With vaccination rates rising and COVID-related restrictions easing, consumers are venturing out to workplaces, stores and restaurants, their expenditures reveal.
Throughout the pandemic, consumers have been focused more on buying durable goods, such as cars, appliances, furniture and home exercise equipment, which together are 33.4% above the levels from February last year. But spending on these types of products fell by 2.8% in May, while spending on services in May rose by 0.7% over the month and are now just 1.2% below pre-pandemic levels.
Many personal care services, such as barbershops, beauty salons and spas, bore the brunt of the shutdowns during the pandemic. Yet consumers seemed eager to return to these shops last month as expenditures in May grew by 4.7% over April. Unlike food services, personal care requires face-to-face interactions — curbside pickup is not an option for many of these types of businesses.
As more workers return to the office, and travelers once again take to the skies, public transportation spending grew by 2.6% over the month. National office demand remains low, and the vacancy rate is at a nine-year high, but office utilization is growing and this could mark the beginning of a turnaround for the sector. Spending in this category in May was also fueled by air travel, where payment is recorded at the point of booking. Many households are making plans to travel later in the summer, so spending on accommodations, which grew by 0.9% in May, is poised for further growth in the coming months.
Spending for most types of goods fell in May. The exceptions are telling. First, energy prices rose significantly, so fuel oil and motor vehicle fuels spending grew by 3.9% and 1.6%, respectively. But consumers were also more eager to put their best foot forward in public. For example, spending on jewelry grew by 7.9% in May after consumers freshened up their wardrobes after more than 15 months draped primarily in leisure wear.
In contrast, consumers are shifting away from both new and used cars, as well as recreational vehicles. And fixing up our homes may be a thing of the past, with spending on tools, new household appliances, furniture and furnishings all declining sharply.
Continued consumer spending is well supported by healthy household balance sheets. The three waves of fiscal support kept personal incomes from falling during the pandemic. With many services not available during the shutdowns, consumers were restrained from spending as much as they might have wanted, so they ended up sending more than a third of those relief payments to their savings accounts.
The savings rate in May fell to 12.4%, the lowest it has been since February of last year, but it remains quite elevated compared to pre-pandemic days. The amount of excess savings accumulated to date is estimated to be about $2.5 trillion, or about 10% of gross domestic product, a formidable stash of spending firepower that will boost the economy through the summer and fall as more stores, restaurants and entertainment venues reopen and welcome customers.
The relatively robust consumer, and business, spending amid continued supply chain bottlenecks has added price pressures throughout the economy. The core personal consumer expenditures price index, which is the Federal Reserve’s preferred inflation measure, rose by 0.5% over the month, a slowdown from April’s pace and less than was expected. The index rose 3.4% compared to a year ago, when price inflation was quite tame.
The Fed continues to believe that price increases will be temporary as imbalances between aggregate demand and supply are resolved, but it is entirely possible that the economy will endure a higher sustained rate of inflation than during the last recovery without entering a wage-price spiral that characterizes “runaway inflation,” as the Fed’s credibility appears to remain intact.
The Week Ahead ….
The highlight this week should be the release of the June jobs report on Friday. The labor market has been a bit of a disappointment recently, with jobs returning slower than hoped as COVID-related fears linger and workers coping with child care needs remain on the sidelines, but most analysts expect an increase of around 800,000 jobs in June, driven once again by the leisure and hospitality sector, with the unemployment rate continuing to tick lower.
Elsewhere, a key look into the factory sector is scheduled to come on Thursday with the Institute for Supply Management’s manufacturing index for June. Factory activity has been strong, but manufacturers have faced both supply chain disruptions and labor shortages. Although these are expected to fade over coming months, it could still be a bumpy road ahead for a full recovery.