Restrained Consumer Spending Curbs U.S. Growth Optimism

Customers enter a store in the SoHo neighborhood of New York on June 18, 2014.

Consumer spending grew less than forecast in May, putting a damper on the strength of the projected rebound in U.S. economic growth this quarter.

Purchases, which account for about 70 percent of the economy, climbed 0.2 percent last month after being little changed in April, the Commerce Department reported today in Washington. The report also showed Americans squirrelled away more money for a rainy day as incomes and inflation picked up.

While some households are heartened by gains in employment and equities, elevated prices at grocery stores and service stations are straining budgets. Shoppers will probably remain circumspect until wage gains are big enough to help cope with rising food and fuel bills.

“Clearly the consumer is getting a bit squeezed here,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who correctly projected the gain in spending. “The second quarter could come in a little lower” than currently projected.

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Stocks fell for the third time in four days on the disappointing spending data and as James Bullard, president of the Federal Reserve Bank of St. Louis, said interest rates may rise by March. The Standard & Poor’s 500 Index (COMFCOMF) dropped 0.1 percent to 1,957.22 at the close in New York.

Photographer: Atisha Paulson/Bloomberg

Customers enter a store in the SoHo neighborhood of New York on June 18, 2014. Close

Customers enter a store in the SoHo neighborhood of New York on June 18, 2014.

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Photographer: Atisha Paulson/Bloomberg

Customers enter a store in the SoHo neighborhood of New York on June 18, 2014.

The median forecast of 76 economists in a Bloomberg survey called for a 0.4 percent rise in spending. Projections ranged from gains of 0.1 percent to 0.6 percent. The previous month’s reading was initially reported as a drop of 0.1 percent.

More Inflation

The Commerce Department’s report also showed inflation was inching closer to the Federal Reserve’s goal. The price measure tracked by the Fed rose 0.2 percent in May from the prior month and was up 1.8 percent from a year earlier. That was the biggest 12-month increase since October 2012. The central bank’s goal is for inflation to climb at around 2 percent.

Incomes advanced 0.4 percent in May, paced by a similar gain in wages and salaries, the report showed.

Disposable income, or the money left over after taxes, rose 0.2 percent in May for the second month after adjusting for inflation, and was up 1.9 percent over the past year, according to today’s report.

Americans decided to put money away rather than spend some of the extra cash. The saving rate increased to 4.8 percent last month, the highest since September, from 4.5 percent.

The economy contracted at a 2.9 percent annualized rate from January through March, the biggest drop-off since the first quarter of 2009 at the depths of the last recession, the Commerce Department reported yesterday. Consumer purchases grew at a 1 percent annualized rate, the weakest pace in five years and revised down from a prior estimate of 3.1 percent.

Photographer: Atisha Paulson/Bloomberg

The U.S. economy contracted at a 2.9 percent annualized rate from January through March, the biggest drop-off since the first quarter of 2009, the Commerce Department reported yesterday. Close

The U.S. economy contracted at a 2.9 percent annualized rate from January through... Read More

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Photographer: Atisha Paulson/Bloomberg

The U.S. economy contracted at a 2.9 percent annualized rate from January through March, the biggest drop-off since the first quarter of 2009, the Commerce Department reported yesterday.

Cutting Estimates

Economists at Morgan Stanley in New York lowered their tracking estimate for spending this quarter to 1.3 percent after today’s spending report from 2.5 percent. That took their GDP projection down to 3.1 percent from 3.8 percent.

Another report today showed households aren’t taking the gloomy news to heart. Consumer confidence last week held near its 2014 high as views on the economy were the second-strongest since 2008.

The Bloomberg Consumer Comfort Index stood at 37.1 in the period ended June 22, unchanged after three weeks of gains and just shy of the 37.9 reading in late April that marked the year’s high point. Perceptions of the broader economy improved for the fifth consecutive time.

“Confidence remained unchanged as consumers await the evolution of gasoline and food prices,” two concerns that “weigh heavily” on spending, said Joseph Brusuelas, a senior economist at Bloomberg LP in New York.

Inflation-Adjusted

Today’s report from the Commerce Department showed that after adjusting for inflation, which generates the figures used to calculate gross domestic product, consumer spending dropped 0.1 percent last month after falling 0.2 percent in April.

One bright spot was auto sales, which accounted for more than half of the 1 percent increase in purchases of durable goods adjusted for inflation.

Cars (SAARTOTL) and light trucks sold at a 16.7 million pace in May, the fastest rate since February 2007.

“Spending has been concentrated in the automobile sector, and consumers have less money left to spend on other things,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York. “If consumers choose to spend on one thing, they’ll spend less on something else. Without much of a financial accelerator, we can’t have an acceleration in spending.”

Purchases of non-durable goods, which include gasoline, decreased 0.3 percent in May after adjusting for inflation.

Utility Use

Household outlays on services declined 0.2 percent, the biggest drop-off since August 2012. The decline reflected cutbacks in utility use as temperatures turned more seasonable after a harsh winter, today’s report showed. The category, which includes tourism, legal help, health care, and personal care items such as haircuts, is typically difficult for the government to estimate until more detailed information is available later this year.

Some companies are concerned about demand. Shoe Carnival Inc. (SCVL), an Evansville, Indiana-based footwear retailer, said shopper traffic has slowed in the past two quarters, and the harsh winter weather in early 2014 meant customers received high utility bills they would’ve had to pay later.

“You combine this fact with higher health-care costs along with unemployment and underemployment, we along with many other retailers have taken a cautious stance on the second quarter,” Clifton Sifford, chief executive officer, said during a conference presentation on June 11.

Labor Market

Nonetheless, an improving labor market remains the cornerstone for future gains in spending and confidence. Employers added 217,000 workers to payrolls in May, lifting the average monthly advance so far this year to 213,600, the most for a year’s average since 1999.

Another report today showed the labor market continues to make steady progress. The number of claims for jobless benefits dropped by 2,000 last week to 312,000, according to figures from the Labor Department.

“Consumer fundamentals are still quite strong,” said IHS’ Behravesh. “We have job growth and better household balance sheets.” The economy will be “pretty much steady as she goes,” he said.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net Vince Golle

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