Consumers Are Back Out Spending, Driving the Recovery

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Consumers likely increased spending last month on services that they shunned earlier in the Covid-19 pandemic, helping fuel the broader economic recovery.

Economists surveyed by The Wall Street Journal expect Friday’s Commerce Department report to show consumer spending rose 0.4% in May. They expect incomes fell 2.7% last month from April, as the boost faded from government stimulus checks sent out earlier in the year.

Consumer spending is supported by rising vaccination rates and ample household savings from rounds of government stimulus when the pandemic restricted businesses and activities. Customers are going out more as states and cities lift the restrictions.

“We believe it’s going to be a hot summer in retail,” said Jonathan Silver, chief executive of Affinity Solutions, a consumer-data firm. “People are just wanting to get out.”

Spending has helped propel the broader U.S. economy, which grew at a 6.4% annual rate in the first quarter. Americans appear to be shifting their spending from big-ticket items to goods and services related to going out amid business reopenings.

Although people spent less on autos, furniture, electronics and building materials in May, they raised their spending on restaurants, and at clothing and health-and-beauty stores, a Commerce Department report released earlier this month showed. Friday’s report offers a more comprehensive look at household finances, including how consumers spent money on goods in contrast to services.

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The economy’s recovery, however, 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, Mr. Silver said. 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.

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.

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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.

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.

Some economists are concerned that fast-rising prices might not be a temporary phenomenon. Friday’s Commerce Department report also will include inflation data—the personal-consumption expenditures price index. Economists expect PCE core prices, which exclude food and energy, rose 0.6% in May from a month earlier and 3.4% from a year earlier.

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.

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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