Business World

Friday 28 July 2017

Americans spending at slowest pace in 20 months

Signs clear that high oil prices are taking toll on the economy

Christopher Rugaber

Americans spent at the weakest pace in 20 months, a sign that fuel prices are taking a toll on the economy.

Consumer spending was unchanged in May, the US Commerce Department said yesterday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1pc.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. That marked the first declines in inflation- adjusted spending since January 2010.

Incomes rose 0.3pc for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1pc in May, after falling by the same amount in the previous month. By that measure, incomes have been essentially flat since the beginning of the year.

Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months.

That followed three months in which employers hired an average of 220,000 new workers each month. The unemployment rate rose to 9.1pc last month.

Fewer jobs and high unemployment leave workers with little leverage to ask for raises.

Slow wage growth hurts the broader economy because consumers have less money to spend.

Consumer spending accounts for 70pc of economic activity. The spike in fuel prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

The economy expanded at an annual rate of 1.9pc in the January-March period. Many economists believe that growth is only slightly better in the current April-June period.

A survey of 38 top economists predicts that that rate will be about 2.3pc. Economists are optimistic for the second half of the year, saying growth should pick up to a 3.2pc pace. They note that two of the biggest factors slowing the economy are abating.

Petrol prices have eased since peaking in early May at a national average of nearly $4 a gallon ($1 per litre), considered a high price in the US. In the past two months they have dropped to a national average of $3.60 per gallon (90 cents per litre), according to AAA's daily fuel gauge.

And US factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami has led to a parts shortage, particularly for auto and electronics manufacturers.

Still, growth must be stronger to significantly lower the unemployment rate, which was 9.1pc last month.

The economy would need to grow 5pc for a whole year to significantly bring down the unemployment rate. Economic growth of just 3pc a year would hold the unemployment level steady and keep up with population growth.

Irish Independent

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