The numbers: Spending on consumer goods in April rose sharply for a second straight month, pointing to a pickup in the U.S. economy in the spring.
Consumer spending jumped 0.6% after a revised 0.5% gain in March, the government said Thursday. Economists surveyed by MarketWatch had predicted a 0.4% increase.
The PCE index, the Federal Reserve’s preferred inflation gauge, rose 0.2%, as did the core rate that strips out food and energy.
The rate of inflation over the past 12 months, however, was unchanged at 2%. Similarly, the core rate was flat at 1.8%. That gives the Fed more room to pursue its current “gradualist” strategy of raising interest rates.
What happened: Americans increased spending by the biggest amount since last November, and outlays were strong even if inflation is taken into account.
The news was not all good, though. Drivers had to spend more on gas because of rising prices at the pump. They also paid more for utilities during an unusually cool month.
While inflation crept higher in April, prices still appear to be quite stable.
Big picture: The increase in spending in March and April was widely expected. The recent tax-code overhaul as well as state and federal tax refunds padded incomes. Americans also husbanded their money in the early months of 2018 and had more savings stored up.
Can they keep it up? Probably, but not at the same pace.
Read: Here’s what businesses did with Trump tax-cut windfall (hint: they didn’t spend it)
A tight labor market and the lowest unemployment rate in nearly two decades are pushing up incomes, but households can’t keep drawing down their savings to increase spending. The U.S. savings rate dropped a few ticks to 2.8% and fell below 3% for only the third time since the end of the 2007-09 recession.
The rate of inflation, meanwhile, is already sitting at the Fed’s 2% target. The central bank has indicated it’s willing to let inflation rise a bit higher for awhile, but the Fed is also intent on raising U.S. interest rates.
Also read: Jobs report expected to point to better hiring — and increased interest rate
A higher cost of borrowing could also slow consumer spending, especially for big-ticket purchases such as autos or new homes.
Market reaction: The Dow Jones Industrial Average
and S&P 500
fell amid renewed worries over a trade war. The 10-year Treasury yield
was little changed at 2.86%.