Consumer Spending Off To A Solid Start in Q2

Scott Anderson
Chief Economist
Bank of the West

The consumer is proving resilient despite the strong headwind of elevated inflation. Nominal consumer spending climbed 0.9% in April. While this is a moderation from the upwardly-revised advance of 1.4% in March, the second quarter in nonetheless off to a solid start. Despite the strong monthly gain, the year ago growth rate slowed to 9.2%, partly due to base effects as nominal consumer spending rose nearly 30% in April 2021.

Factoring in inflation, consumer spending was still solid. Real consumer spending rose 0.7%, in-line with consensus expectations and up from the 0.5% increase in March. This is a robust 8.7% annualized pace. Gains were broad-based with spending on goods climbing 1.0% on the strength of a 2.3% increase in durable goods spending. Services spending rose a more modest 0.5%.

Real Consumer Spending Growth Improved Last Month

The continued solid growth in consumer spending is being partially supported by sturdy increases in nominal income amid a tight U.S. labor market. Nominal personal income advanced 0.4% in April with wages and salaries rising a robust 0.6% - a healthy 7.4% annualized pace. The May Employment Report released next Friday is forecast to show a solid 310,000 nonfarm payroll gain with the unemployment rate dropping to 3.5% and an increase in average hourly earnings of 0.4% from April levels.

Still, consumers are having to dip into their savings more and more to support their spending gains in the face of rapidly rising prices. Consequently, the personal saving rate fell to 4.4% in April to its lowest level since September 2008.

Personal Saving Rate Fell Further In April

There was also something in the report for the Fed to breathe a little easier as it ramps up efforts to lower stubbornly-high inflation. The core PCE price index – which excludes the volatile food and energy indexes – climbed 0.3% in April, unchanged from March. More importantly, the year ago growth rate moderated to 4.9% from 5.2% in March.

Annual Growth in Core PCE Inflation Slowed in April

While growth of nearly 5% in the Fed's preferred measure of inflation is well above its target of 2%, it is finally moving in the right direction. Core PCE growth from a year ago appears to have peaked at 5.3% back in February and has slowed for two consecutive months now. We expect annual growth in core PCE inflation to continue moderating toward 4.0% by the end of the year in response to aggressive rate hikes and as favorable year ago comparisons kick in this spring.

Consumer Spending Outlook
U.S. households are still well-positioned to grow their spending with a historically low unemployment rate, tidy balance sheets, solid nominal income gains, and near record levels of wealth and excess savings. However, real consumer spending growth is expected to cool down to around 3.5% year on year down from unsustainable growth of 7.9% in 2021 and about in-line with the long-run average of 3.3% from 1948 to 2021. Thereafter, real consumer spending growth is projected to fall to 2.1% and 1.6% respectively in 2023 and 2024 as higher interest rates, diminished pent-up demand, and dwindling savings begin to bite harder.

Real Consumer Spending Growth To Slow Sharply in 2022

The risks to this forecast are still more heavily weighted to the downside than the upside. Continued declines in equity markets, a rapidly cooling residential housing market and more aggressive rate hikes by the Fed to curb inflation are the biggest downside risks and could undermine our consumer spending growth projections over the next couple of years. An economic or financial shock from abroad is another growing concern.

To learn more, check out this week's U.S. Outlook Report.


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