U.S. consumer spending misses expectations on weak services

WASHINGTON Thu Jun 26, 2014 8:40am EDT

People shop at The Grove mall in Los Angeles November 26, 2013.  REUTERS/Lucy Nicholson

People shop at The Grove mall in Los Angeles November 26, 2013.

Credit: Reuters/Lucy Nicholson

WASHINGTON (Reuters) - U.S. consumer spending rose less than expected in May, likely held back by weak healthcare spending, which could prompt economists to temper their second-quarter growth estimates.

The Commerce Department said on Thursday consumer spending increased 0.2 percent after being flat in April. Spending, which accounts for more than two-thirds of U.S. economic activity, had been forecast rising 0.4 percent after a previously reported 0.1 percent dip in April.

When adjusted for inflation, consumer spending fell for a second straight month, suggesting spending this quarter could struggle to regain momentum after growing at its slowest pace in nearly five years in the first quarter.

Spending in May was probably constrained by weak healthcare spending as outlays on services barely rose for a second month.

While reports ranging from employment to manufacturing and the services industries suggest the economy has rebounded after sinking in the January-March period, the consumer spending data indicated that growth would probably fall short of the 4.0 percent annual pace that some economists are expecting in the second quarter.

Growth contracted at a 2.9 percent pace in the first quarter, the worst performance in five years.

Still, the economy is regaining strength enough for inflation to perk up, which should comfort Federal Reserve officials concerned about price pressures being too low.

A price index for consumer spending increased 0.2 percent in May, rising by the same margin for a third consecutive month. In the 12 months through May, the personal consumption expenditures (PCE) index was up 1.8 percent, the largest gain since October 2012. It had advanced 1.6 percent April.

Excluding food and energy, prices also posted a 0.2 percent gain. That followed a similar increase in April. The so-called core PCE index increased 1.5 percent from a year ago. That was the biggest increase since February last year and followed a 1.4 percent rise in April.

Both inflation measures still remain below the Fed's 2 percent inflation target. Inflation, which has been depressed by weak medical care costs and sluggish wage growth, is being watched for clues on the timing of the central bank's first interest rate hike.

The Fed, which is scaling back the amount of money it is pumping into the economy through monthly bond purchases, has kept its benchmark lending rate near zero since December 2008.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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