The Economy

Consumer ‘Wants’ Push Up Spending in June

Strong discretionary spending signals consumer confidence, rising solidly along with several other key economic indicators.
William SprouseJuly 31, 2018

U.S. consumer spending grew 0.4% in June, according to the Commerce Department, pushed by spending on restaurants and accommodations. Automobile sales were also strong.

“More spending on ‘wants,’ not ‘needs,’ is always a good sign of consumer confidence,” Jennifer Lee, an economist at BMO Capital Markets, told Reuters. “As long as incomes continue to rise and job creation remains strong, consumer spending should remain solid over the remainder of the year.”

The Commerce Department revised May consumer spending to 0.5%, up from a previously reported 0.2%. The June growth was in-line with economists’ expectations. Spending on goods, which jumped 0.9% in May, remained unchanged in June. Spending on services grew 0.6% in June, up from 0.3% in May.

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Consumer spending accounts for more than two-thirds of the U.S. economy.

Meanwhile, the Labor Department’s Employment Cost Index rose 0.6%.

Wages and salaries climbed 0.5% in the second quarter, down from 0.9% in the first quarter. Wages and salaries were up 2.8% for the 12 months ended June, the biggest one-year gain since September 2008.

The core Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation measure, hit the 2% target in March for the first time since December 2011.

“Both wages and inflation were tame in the second quarter after popping higher in [the first quarter],” said Chris Low, chief economist at FTN Financial. “Consumers find themselves in much better shape than previously reported with more income … and a much higher saving rate than you’d expect to see this far into a business cycle expansion.”

The PCE excludes food and energy components, which are volatile.

Strong consumer spending is expected to keep the Federal Reserve on track to raise interest rates gradually.

GDP growth was a strong 4.1% for the second quarter, almost double the first quarter’s 2.2% mark.

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