Personal consumption expenditures surged 0.6% after adjusting for inflation in April, three times the pace of the month prior. The saving rate dropped back to 5.4% after jumping in the first quarter, but remains elevated relative to the pace of the fourth quarter. Look for another rise in spending and drop in the saving rate for the month of May when wealth continued to firm along with consumer sentiment.
Consumers spent aggressively on big ticket items, most notably vehicles, as incentives were sweetened. This is one of the areas we are watching closely since automakers were given a waiver to provide subprime financing when they restructured during the financial crisis; it is one of the few sectors where credit remains extremely easy. The concern is that easy financing has pulled some demand ahead and could end badly with an increase in defaults. The automakers are also pushing lease deals and fleet sales again, which could hurt the industry in years to come when the market for nearly new vehicles becomes flooded.
We are also seeing some comeback in housing-related durables. Everything from furniture to appliances and carpeting is regaining traction with recent sales increases and the rebound in home values. Consumers are much more willing to remodel and redecorate when their homes are appreciating instead of depreciating.
Gains in incomes were solid in April, including upward revisions to the historical data. Wages and salaries, in particular, are showing increases. Recent payroll gains coupled with some acceleration in wages helps to explain the strength in wages and salaries. Federal Reserve Chair Janet Yellen has made her desire for sustained and more rapid wage growth a prerequisite for the next interest rate hike; she will decide whether the Fed moves in June or July.
Separately, the personal consumption expenditure (PCE) index, the Fed’s preferred measure of consumer inflation, moved up 0.3% in April on the heels of a rise in prices at the gas pump. Year-over-year gains in the total also firmed and finally crossed the 1% threshold. That is still half of the Fed’s 2% target, but still a move in the right direction. The core PCE rose 0.2%, and held at a 1.6% pace relative to a year ago. The moral of the story for the Fed is that inflation has not flared but firmed, which is all that members need to feel comfortable in averting another downdraft in inflation.
Bottom Line: Consumers are earning a bit more, and spending it. This provides yet another piece of evidence that consumers are starting to regain their stride. The evidence of a rebound in growth is mounting. So is the rationale for a rate hike; the only question is whether it will come in June or July. We continue to hold to our call for June.