Consumer spending recorded its largest increase in nearly six years in May, indicating that the U.S. economy is picking up momentum.
Personal spending climbed a seasonally-adjusted 0.9% from a month earlier. The reading measures what consumers spend on everything from cars to clothing. Consumer spending accounts for more than two-thirds of U.S. economic activity. (Source: U.S. Department of Commerce, June 25, 2015.)
Prior to May, lower gas prices and a stronger labor market were not enough to encourage households to enhance consumer spending. The May reading suggests that households were confident to spend their excess money on goods and services.
However, in order to fund their increased spending, households had to pull back savings. During the month, the personal savings rate fall to 5.1% from 5.4% in April.
The strong consumer spending was just one of many strong economic reports published this week, suggesting the U.S. economy is rebounding from a contraction in the first quarter. On Thursday, a report from the Labor Department showed the number of people filing for unemployment benefits fell to a seasonally-adjusted 271,000 for the week ended June 20. It was the 16th straight week that claims had held below 300,000. (Source: Labor Department, June 25, 2015.)
Strong consumer spending and a tight labor market confirm the economy is picking up. Last week, the Federal Reserve announced that it was moving towards increasing the cost of borrowing sometime in September. The numbers published today back up the central bank’s case to hike interest rates later this year.