The US showed signs it was leaving behind a soft start to 2017 as new data revealed consumer spending grew at its quickest pace of the year in April, suggesting the world’s biggest economy was shrugging off political turmoil and was again poised to lead a global recovery.
Consumer spending is the key driver of the US economy, and a slowdown earlier in the year held gross domestic product growth to an annual pace of just 1.2 per cent in the first quarter. Yesterday, the Atlanta Fed said the stronger data helped its closely-followed GDP tracker to project second-quarter growth of a robust 3.8 per cent.
“This affirms our view that the US economy will reaccelerate after a winter lull and overall growth will remain firmly in the 2 per cent range in the first half of the year,” Diane Swonk of DS Economics said of the Bureau of Economic Analysis data, which also showed solid gains in personal incomes.
Household expenditure grew by a seasonally adjusted 0.4 per cent from March, the most since December, according to the BEA. Spending on discretionary items, which excludes necessities like food and clothing, rose at its quickest pace in seven months, according to Berenberg Capital Markets.
The rebound comes as the world’s two other major developed economies, the eurozone and Japan, published data that also showed renewed signs of breaking out of post-crisis doldrums.
While US inflation has remained subdued, the brightening picture at home and abroad is likely to provide reassurance to Federal Reserve policymakers planning for their fourth increase in short-term interest rates since the end of the crisis. The US central bank has signalled a quarter-point move is likely at its June meeting in two weeks.
“From the Fed’s perspective the most important thing is the economy is clearly bouncing back from the weak first quarter,” said Mickey Levy, an economist at Berenberg. “You are clearly seeing a rebound in consumer spending.”
Fed chair Janet Yellen and her fellow rate-setters head into the June meeting confronted with contradictory stories on the central bank’s two key goals. The US is getting ever closer to full employment after adding jobs at an average monthly pace of 174,000 over the past three months, but core inflation — measured by the personal consumption expenditures gauge — has stayed stubbornly below the Fed’s 2 per cent target.
Inflation numbers contained in Tuesday’s report showed year-on-year price increases on core items other than food and energy slowed from 1.5 per cent from 1.6 per cent. Nevertheless, many Fed policymakers are willing to look through below-target inflation numbers given the strong jobs market. Unemployment is now at 4.4 per cent, below the median rate of 4.5 per cent Fed officials projected in March for the end of the year.
Lael Brainard, a member of the Fed’s board of governors, said on Tuesday that scaling back monetary policy stimulus will probably be appropriate “soon”, in an indication that she may support a rate increase at the Fed’s upcoming June meeting.
However Ms Brainard also said there had been no progress in inflation towards the Fed’s target over the past year. “If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” she said in New York.
Other indicators suggest the US recovery is on track. House-price growth was the swiftest in 33 months in March, according to the S&P CoreLogic Case-Shiller national house price index, which rose 5.8 per cent. And while consumer confidence readings from the Conference Board were down in May, at 117.9 the index remains well above the level of just over 100 in October, on the eve of the election.
The share of US consumers seeing jobs as plentiful rose on the month, adding to evidence that the country’s job-creation engine is firing robustly.
In Japan and the euro area, the economic picture has also firmed. Japan’s jobless rate held at 2.8 per cent, its lowest in more than two decades, while retail sales increased by 3.2 per cent year-on-year in April.
In the eurozone, the recovery is touching parts of the region that were among the worst hit by its debt crisis. While the EU’s Economic Sentiment Indicator for the region dipped slightly between April and May, readings for France and Portugal hit fresh multiyear highs. A reading for France, the region’s second-largest economy and until this year one of its laggards, hit 107.7 — the highest level since June 2011.
A separate reading for Portugal, which sought a bailout package from the International Monetary Fund and the commission during the depths of the crisis, rose from 111.6 to 113.8 — its highest level since 2000. The readings are seen as one of the best indicators of growth rates in the single currency area.