The American Consumer – Alive and Well in May!

Total personal income increased by 0.5% in May (in nominal terms) for the second month in a row. Looking at the individual components of personal income, wages and salaries were also up by 0.5%, while proprietor’s income increased by 0.7% and rental income rose by 0.8%. Income from receipts on assets (interest and dividend income) increased by 1.0%.  Personal consumption expenditures shot up by 0.9% after rising by just 0.1% in April.

Real disposable income (adjusted for taxes and inflation) increased by 0.2% and real personal consumption expenditures rose by 0.6%. Spending on durable goods (cars, appliances etc.) drove most of the increase, rising by 2.3%. Spending on nondurable goods (clothing, food, gasoline) posted a more moderate increase of 0.9%. Meanwhile, household outlays on services grew by just 0.2%.

As a result of spending running well ahead of income last month, the personal saving rate fell from 5.4% in April to 5.1% in May.

On a year-to-year basis:

• Real disposable income in May increased by 3.5%
• Real personal consumption expenditures were up by 3.4%
• Growth in real spending on goods (4.7%) continues to outpace spending on services (2.8%) although in dollar terms, Americans spend more than two times as much on services as they do goods.

Consumer prices were up over the month in May by 0.3% but over the year prices have edged higher by only 0.2%, well below the 3.5% annual increase in real disposable income.

After several months of sluggish spending, this was an encouraging report. The May consumer spending figures align more closely to improvements in the labor market and point to a stronger second quarter GDP report. Consumers on the whole are in better shape than has lately been assumed. A recent report released by the Federal Reserve showed that household balance sheets continue to improve. Household net worth increased by $1.6 trillion during the first quarter of this year to reach a record high of nearly $85 trillion. That equates to a year-over-year growth rate of 5.7%. The largest contributor to first quarter growth was the rise in the value of financial assets and capital gains. Gains in home equity also contributed but to a lesser degree. Of course, that means improvements in household finances are tilted to households that own a home, a stock portfolio or a retirement account. Stronger wage and salary gains would be a welcome development for everyone else. (Kimberly Ritter-Martinez)

Source:  http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm