Tags: Economic | Growth | Stalls | Consumers | Spend | Less | Prices

Economic Growth Stalls as Consumers Spend Less After Prices Soar

Monday, 27 June 2011 11:35 AM EDT

Consumer spending was flat in May, breaking a string of 10 straight months of gains, as households struggled with rising prices and automakers failed to deliver the models Americans wanted.

When adjusted for inflation, spending slipped 0.1 percent, the Commerce Department said on Monday, falling for a second straight month.

The report, which showed underlying inflation quickening, suggested that consumer spending would offer little support to the economy in the second quarter. In the first three months of the year, it advanced at a modest 2.2 percent annual rate.

Consumer spending, which accounts for 70 percent of U.S. economic activity, rose 0.3 percent in April and economists had expected a gain of 0.1 percent last month.

"We will be trimming the consumption number for the second quarter and GDP for the second quarter. That's worth a couple of tenths of a point," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

While the report fits in with other data illustrating the loss of momentum in the economy, falling gasoline prices should lift spending and therefore growth in the third quarter.

Gasoline prices have dropped significantly from their peak of $4.02 a gallon in early May.

"We doubt the economy's engines are getting ready to go into reverse here," said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York.

"We view this setback for the economy as temporary, now that energy prices that got us into this mess seem to be reversing."

Investors on Wall Street shrugged off the data, lifting U.S. stocks. Prices for U.S. Treasury debt were marginally lower and dollar slipped against a basket of currencies.

WEAK AUTOS DAMPEN SPENDING

Consumer spending last month was held back by a sharp drop in motor vehicle purchases as disruptions to auto production due to a shortage of parts in the aftermath of Japan's March earthquake and tsunami left some models out of stock.

Spending on durable goods fell 1.5 percent after being flat in April. Motor vehicle sales in May set their lowest rate since September.

But there are signs disruptions to auto production are easing. The Chicago Federal Reserve's Midwest manufacturing index rose to 84.0 in May from 83.6 in April, partly reflecting a bounce back in autos.

While gasoline prices are retreating, underlying inflation pressures continue to percolate.

The core personal consumption expenditures price (PCE) index -- excluding food and energy -- increased 0.3 percent, the largest increase since October 2009, after rising 0.2 percent the prior month.

The core index, which is closely watched by Federal Reserve officials, increased 1.2 percent in the 12 months through May, the biggest increase since August. The index rose 1.1 percent year-on-year in April and the Fed would like to see it close to 2 percent.

The overall PCE index rose 0.2 percent after rising 0.3 percent in April. Compared to May last year, the index was up 2.5 percent, the largest rise since January 2010, after increasing 2.2 percent in April.

Incomes in May rose 0.3 percent for a second month, and disposable incomes adjusted for inflation edged up 0.1 percent. With spending weak, savings rose to an annual rate of $591.1 billion from $568.0 billion in April.

© 2024 Thomson/Reuters. All rights reserved.


Headline
Consumer spending was flat in May, breaking a string of 10 straight months of gains, as households struggled with rising prices and automakers failed to deliver the models Americans wanted. When adjusted for inflation, spending slipped 0.1 percent, the Commerce Department...
Economic,Growth,Stalls,Consumers,Spend,Less,Prices,Soar
535
2011-35-27
Monday, 27 June 2011 11:35 AM
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