US Consumption Plays Catch Up in May as Savings Rate Declines

Consumer spending drives business momentum and accounts for two-thirds of US economic activity. A rise in consumer spending leads to an increase in the price of goods and services, and often, to increased inflation. As a result, increased consumer spending is good for the health of the US economy.

According to the monthly data released by the US Department of Commerce on June 25, consumer spending increased by 0.9% in May. This is above an expected market consensus increase of 0.7%. May’s rise is also the biggest gain since August 2009.

While personal income increased by 0.5% in May, the personal savings rate inched down to 5.1% from 5.4% in April. Income gain is in line with firming labor markets and optimistic consumer sentiment. Savings are still at elevated levels, which suggests that consumer spending could still accelerate going forward. This would be positive for ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Consumer Staples Select Sector SPDR Fund (XLP).

Spending on goods such as automobiles jumped by 2.2% in May, while spending on utilities grew by just 0.3%.

The firming US economy stemming from accelerated consumer spending could mean that the Fed will start raising interest rates this year.

Since consumer spending forms two-thirds of the US economy, it’s important to watch this variable. Increasing consumption is positive for inflation. Inflation is positive for gold because it’s considered an inflation hedge. On the other hand, inflation hitting the Fed’s target could prompt it to raise interest rates, and higher rates are usually negative for gold.

Rising inflation is also negative for gold-backed ETFs such as the SPDR Gold Trust (GLD) as well as for gold stocks including Newmont Mining (NEM), Gold Fields (GFI), and Kinross Gold (KGC). Combined, these three stocks account for 14.4% of the VanEck Vectors Gold Miners ETF (GDX).

In the next part of this series, we’ll see how US inflation is progressing given stronger consumer spending.