US consumer spending takes breather amid shortages

US consumer spending paused in May as shortages hurt motor vehicle purchases, but the supply constraints and increased demand for services helped to lift prices, with the Federal Reserve’s main inflation measure rising by the most in 29 years.

There was, however, some good news on inflation. Consumers this month perceived higher inflation to be temporary, a survey showed on Friday, aligning with the views of Fed Chair Jerome Powell and Treasury Secretary Janet Yellen. Consumers’ inflation expectations are key as they can influence households’ behavior.

With at least 150 million Americans fully vaccinated against Covid-19, which is allowing the economy to reopen and people to travel, dine out and engage in other activities that were restricted during the pandemic, consumer spending is expected to pick up in the coming months. Trillions of dollars in excess savings and rising household wealth due to gains in stock prices and home values are expected to provide a powerful tailwind.

“Spending growth will shift to services from goods, and drive a strong economic recovery throughout the rest of 2021 and all of 2022,” said Gus Faucher, Chief Economist at PNC Financial in Pittsburgh. “The biggest drags are higher prices for some goods and services and shortages due to production bottlenecks.”

The unchanged reading in consumer spending, which accounts for more than two-thirds of US economic activity, followed an upwardly revised 0.9% jump in April, the Commerce Department said. Consumer spending was previously reported to have increased 0.5% in April. Economists polled by Reuters had forecast consumer spending would rise 0.4% in May.

Motor vehicles and some household appliances are scarce because of supply bottlenecks stemming from the pandemic. A global shortage of semiconductors is hampering motor vehicle production. Spending is also starting to shift back to the services part of the economy, which accounts for two-thirds of consumer spending, though the pace last month was insufficient to offset the drag from goods.

Spending on services rose 0.7%, led by recreation, restaurants and hotels as well as housing and utilities. Spending on goods fell 1.3%, with outlays of long-lasting goods like motor vehicles tumbling 2.8%. Goods spending surged as the pandemic confined people to their homes.

Published in The Express Tribune, June 27^th, 2021.

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