Consumer Spending is Primed to Fuel Summer Growth

Higher prices and product shortages likely hurt sales for some goods such as autos last month. Consumer demand is also weakening for some items—such as household appliances and furniture—that people bought during the pandemic while many stores and restaurants were closed. Economists expect Americans to step up spending on travel, restaurants and other services this summer—while continuing to spend less on goods as states and cities lift restrictions.

“Overall consumers are still well positioned to attack the summer with a lot of enthusiasm,” said Gregory Daco, chief U.S. economist at Oxford Economics. “We have households that have a strong itch to spend, they have the means to do so and they have fewer and fewer health reasons not to indulge.”

Stronger demand is helping drive up prices, with supply lagging for many products and employers struggling to find available workers to fill openings. The core personal-consumption expenditures price index, which excludes often volatile food and energy items, rose 0.5% in May from a month earlier and 3.4% from a year earlier, the fastest pace since 1992.

Spending has helped propel the broader U.S. economy, which grew at a 6.4% annual rate in the first quarter. Outlays have been supported by rising vaccination rates and ample household savings from rounds of government stimulus when the pandemic restricted businesses and activities.

Consumers spent 0.7% more on services in May than April. They curtailed spending on long-lasting goods such as cars and furniture by 2.8% last month.

Now that the economy is reopening more, Jennifer McRae’s life is starting to get back to normal. Ms. McRae, 67 years old, of Albuquerque, N.M., typically takes an annual trip to a spa, but she didn’t go last year after the pandemic hit.

Ms. McRae said she planned to enjoy a spa day this week with her sister and daughter, soaking in hot springs, getting massages and practicing yoga. She also intended to dine out several times this week after relying on takeout food for much of the past year.

“I like being around people again,” Ms. McRae said. But, she added, “I’m seriously worried about the economy.”

Ms. McRae said she was particularly concerned about rising gas and home prices. She wants to buy a home in Arizona, but prices in the neighborhood she desires have shot up since April.

The Federal Reserve aims for 2% annual inflation to keep the economy growing at a healthy pace. Fed Chairman Jerome Powell said earlier this week that the increases in prices had been larger than central bankers had expected and may prove more persistent. He nevertheless repeated his view that shortages—including of used cars, computer chips and workers—would fade over time, bringing inflation closer to the Fed’s 2% long-run target.

The economy’s recovery continues to be uneven. A recent downward trend in worker filings for unemployment benefits stalled in mid-June. Hiring is picking up but lagging behind gross domestic product growth as millions of workers remain sidelined because of factors such as expanded unemployment benefits and increased child-care responsibilities.

Higher-income Americans are driving much of the spending growth, said Jonathan Silver, chief executive of Affinity Solutions, a consumer-data firm. They have more money to pay for services that they weren’t able to throughout much of the pandemic, he added.

Households with incomes of more than $200,000 spent 16% more on restaurants in May than in April. Those with incomes between $31,000 and $60,000 increased their spending by 5%, according to an analysis of credit- and debit-card transactions from Affinity Solutions.

Personal income fell 2% in May from April, as the impact faded from government stimulus checks sent out earlier in the year. Incomes fell in April after rising sharply in March due to the government’s disbursement of $1,400 stimulus checks to many households. Growth in wages and salaries will be an important driver of spending as the effect of the fiscal stimulus wanes, economists say.

Pay, particularly for lower-wage workers, has been rising rapidly as employers seek to fill jobs in a tight labor market. Average weekly wages in leisure and hospitality, the sector that suffered the steepest job losses in 2020, were up 10.4% in May from February 2020, Labor Department data show, outpacing the private sector overall.

Write to Sarah Chaney Cambon at [email protected]