U.S. consumers have cut back on their spending habits and it seems that saving money is the way to go. According to reports, Americans are being cautious with their money and this was evident from the flat reading on consumer spending for April.
As reported by the Commerce Department on Monday, consumer spending last month was the weakest since January. Despite this, incomes hiked by 0.4 percent.
The spending pace in the last 12 months also plummeted to its lowest in several years yet this decline has been attributed to the low gasoline prices. Although gas prices recently hiked, they are still playing catch up to the 2014 levels.
According to the report data, consumers reduced spending on long-lasting goods such as cars as well as on nondurable items such as natural gas. This decline was expected due to the warmer weather. Interestingly, consumers spent considerably more on services like eating out and dry cleaning.
Consumer spending constitutes more that 70% of the U.S. economy. The road to recovery from the devastating recession has been largely characterized by slower spending owing to the devastating effects it had on labor market.
Economists have forecasted a boost in spending as a result of an upsurge in hiring as well as lower gasoline prices over the next few years. The predictions are however yet to materialize since Americans are saving more as opposed to accumulating debt by using their credit cards. In April, the savings rate hiked by 0.4% from 5.2% to 5.6% and interestingly, for five months straight, the savings rate has been above 5% for the first time in 2 years.
If consumers don’t boost spending in May and June, the U.S. economy is poised to post yet another below par performance by the end of second quarter. This is since the U.S. economy relies more on consumers as large-cap export companies are negatively impacted by a strong dollar (USD) while energy producers are being haunted by low oil prices.
A lead economist at Oxford Economics, Gregory Daco, commented that the low spending figure just at the start of the second quarter will most likely translate to a gross domestic product (GDP) below 2%. Before the Daco report, in a poll by MarketWatch, economists had forecasted a 3.2% gain in the GDP.
Meanwhile, inflation was flat in April as gauged by PCE price index while at the same time the core rate rose by 0.1%. The U.S. Federal Reserve is hoping to see inflation moving close to 2 percent on a year over year basis.