Consumer Spending Ticks Upward, Jobless Falls to 15-year Low

Consumer spending rose by the largest amount in nearly half a year even as incomes remain stagnant.  According to a new report by the Commerce Department, consumer spending rose 0.4% in March, which is double the February rate. While a sharp rise, it falls short of the 0.5% growth rate that economists had expected.

Adjusted for inflation, the growth was even lower: 0.3%, up from the post-inflation flat rate of the prior month.

Consumer spending rose by the largest amount in nearly half a year even as incomes remain stagnant.  According to a new report by the Commerce Department, consumer spending rose 0.4% in March, which is double the February rate. While a sharp rise, it falls short of the 0.5% growth rate that economists had expected.

Adjusted for inflation, the growth was even lower: 0.3%, up from the post-inflation flat rate of the prior month.

The news of a resurgence of consumer spending has had a mixed response, as some economists note that a rise in spending coupled with flat wages is unsustainable, and flat wages as the employment climbs indicates significant slack remains in the labor market. Higher incomes have been predicted by economists for some time, but have failed to materialize even as 2015 continues to post strong job gains after 2014’s sharp rise in jobs.

Low GDP Growth

Yesterday, the Bureau of Economic Analysis announced GDP growth in the first quarter was just 0.2%, a sharp fall from the 2.2% real GDP growth that the BEA saw in the fourth quarter of last year.

The BEA said a fall in personal consumption led the GDP declines, with personal consumption expenditures showing decelerating growth, while a fall in exports and nonresidential fixed investment were also headwinds to the U.S. economy. The BEA also noted private inventory investment and federal government spending contributed to the GDP growth, but was insufficient to fully offset the headwinds from other sectors of the economy.

Expectations were much higher, although modest, for the first quarter. On average, economists had expected 1% GDP growth for the first quarter, a sharp fall from previous more optimistic expectations. Several leading economists at the World Bank, the International Monetary Fund, and leading investment banks had downgraded growth in the U.S. as personal consumption failed to materialize.

Additionally, some economists worry about a new normal of “secular stagnation” in which growth rates remain low, even if catalysts for consumption such as a precipitous fall in oil would have led many analysts to believe personal consumption would rise. The cause of this lower growth rate remains fiercely debated, as does its very existence.

Low Jobless Claims

With low GDP growth and flat wages, the economy is nonetheless seeing more demand for workers in a sign that unemployment will continue to fall—but the concomitant rise in wages may not be realized. According to the Department of Labor, jobless claims fell to their lowest in 15 years, as first-time unemployment filings fell to 262,000, a fall of over 10% from the previous week and the lowest rate since the middle of April in 2000. Economists had expected a substantially higher jobless rate, although many expected a decline to appear.

Whether the fall in jobless claims will continue, and job security will increase, remains debated. According to one economist at an investment bank, employers are no longer feeling a labor glut and are instead considering increasing their headcount. This may in turn be a leading indicator of greater investment in the broader economy.