Consumer Spending Up Sharply in June
Consumer spending increased in June at the fastest pace in 10 months, the Commerce Department reported Thursday, fueling concern over inflation and whether the economy will have room for production of exports.
The department said personal consumption spending, which includes virtually everything except interest on debt, shot up a seasonally adjusted 1% in June, the steepest climb since a 1.3% gain last August.
The report was a disappointment to many economists who are looking for growth in consumer demand to slow in order to narrow the nation’s trade deficit.
Excessive consumer demand implies that imports will grow and that factories will have difficulty increasing production of exports if they also have to step up manufacture of goods for domestic buyers. This strain on factory capacity could add to inflation if buyers bid up the price of scarce goods.
In another economic report adding to inflation concerns, the Labor Department said import prices, one of the main inflationary threats facing the U.S. economy because of the weaker dollar, rose 2.7% in the April-June quarter, the biggest increase in more than a year.
The climb followed a 1.2% increase in the January-March period and was the steepest since the 4.1% jump in the first three months of 1987, which was attributed almost entirely to rising crude oil prices.
Could Spur Fed Action
Most analysts were expecting consumer demand to slow after the October stock market crash, but that has not happened.
“There’s some real danger here that we will end up with too much of a good thing,” warned David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer in New York.
“This consumer spending is so strong it probably will trigger, at some point, Federal Reserve actions to push interest rates higher,” he said, adding that the move most likely will come after Aug. 16 when Federal Reserve policy-makers next meet to consider monetary policy.
The report on consumer spending also showed that Americans’ personal income jumped a healthy 0.7% to $4.04 trillion in June, the best showing in three months. It followed a 0.5% rise in May, a modest 0.2% increase in April and a 1% jump in March.
The gain in income in part reflected healthy increases in employment in June. The unemployment rate dropped to 5.3% last month, a 14-year low.
With spending rising a bit faster than income, Americans’ personal savings rate fell slightly to 4.3%, compared to 4.4% in May. Still, the average savings rate for the first half of 1988, 4.1%, is up substantially from 3.2% in 1987.
Americans’ after-tax income increased a seasonally adjusted 0.8% in June after shooting up 2.4% in May. The department said tax payments declined in both May and June after higher-than-average payments in April.
The department gave these details of spending:
- On durable goods, “big ticket” items expected to last three or more years, spending rose $8.6 billion in June, compared to an increase of $2.7 billion in May.
- On non-durable goods, spending rose $4.5 billion in June, compared to $4.6 billion the month before.
- On services, spending rose $17.7 billion last month, compared to $11.3 billion in May.
Sandra Shaber, an economist with the Futures Group, a Washington consulting firm, said the June increase in personal spending was not as alarming as it might have been because it was likely temporarily bolstered by heavy use of electrical power to run air conditioners.
“The trend in consumer spending is about 2% (annual) growth. Certainly it’s not driving the economy,” she said.
