Americans boosted their spending by 0.6% in April, the biggest increase in five months, while a gauge of inflation remained at the Federal Reserve’s optimal level for a second straight month.
The Commerce Department said Thursday that last month’s increase in consumer spending was the largest since a 0.7% rise last November. The gain is an encouraging sign that consumer spending is beginning to show life after nearly stalling out at the beginning of the year. Economists are hoping a revived consumer sector will support stronger growth in the current quarter.
An inflation measure closely watched by the Fed rose by 2% in April, compared with a year ago, the second month it has achieved the Fed’s target for inflation after years of chronically low inflation.
The Fed seeks to manage the economy to achieve moderate annual gains in inflation of around 2%. However, for the past six years it has failed to achieve that goal as the fallout from the country’s worst recession in seven decades depressed wages and made it hard for businesses to raise prices.
Now that inflation is finally rising to the Fed’s target level, the expectation is that the central bank will continue to gradually raise its benchmark interest rate to make sure the economy does not overheat. The Fed is expected to boost rates for a second time this year when it meets in June.
Meanwhile, the Labor Department reported Thursday that the number of Americans filing applications for unemployment benefits dropped by 13,000 last week to 221,000. Jobless claims, a proxy for layoffs, have been below 300,000 for more than three years, evidence of the strength in the labor market.
The government will release its report on May employment on Friday. Unemployment fell to a 17-year low of 3.9% in April.
The 0.6% rise in consumer spending followed a strong 0.5% gain in March and reflected a 0.3% increase in purchases of durable goods such as cars and a 0.9% jump in spending on non-durable goods, an increase that was heavily influenced by the recent rise in gasoline prices.
Consumer spending is closely watched since it accounts for 70% of economic activity. The government reported Wednesday that the overall economy, as measured by the gross domestic product, grew at a modest 2.3% annual rate in the January-March quarter.
That was a significant slowdown from growth rates around 3% in the previous three quarters. However, economists believe with consumer spending now reviving, GDP growth should accelerate to 3% or better in the second quarter.
The 0.3% rise in incomes reflected a solid 0.4% in the key category of wages and salaries.
With spending growing faster than incomes, the saving rate slipped to 2.8% of after-tax incomes in April, down from 3% in March and the lowest level since a 2.4% saving rate in December.