Incomes are up, but consumer spending slowed in May after rebounding in March and April. (Getty Images)
Americans' personal income soared last month, but a spending slowdown potentially threatens the country's second-quarter economic growth, according to a report published Friday by the Bureau of Economic Analysis.
After adjusting for inflation, after-tax income in the U.S. jumped 0.6 percent in May for its largest monthly leap in more than two years. Disposable income ended up gaining more than 2 percent on the year for its best annual rate of expansion since October.
That extra cash didn't seem to spur Americans into spending, however, as personal consumption expenditures saw only a 0.1 percent gain on the month for the metric's worst showing since February. Spending broadly rebounded in March and April after starting the year on a soft note, but Friday's report suggests consumers slipped back into frugality in May despite pay increases.
That's not a good sign or the country's second-quarter gross domestic product numbers. Analysts have been expecting a healthy rebound after U.S. GDP rose at only a 1.4 percent clip during the first three months of the year. But with consumer spending accounting for the lion's share of expansion in any given quarter, evidence of a shopping slowdown isn't promising.
Still, the income gains were a welcome sign after years of lackluster pay progress. Gary Cohn, the former Goldman Sachs president now in charge of running President Donald Trump's National Economic Council, said during an appearance Thursday on MSNBC that the administration is primarily unhappy about a general lack of "wage inflation" in the labor market.
But Cohn said he's expecting more consistent pay increases moving forward as the country moves closer to – or arguably deeper into – full employment.
"When we start having a scarce labor supply in the United States, and we're getting close to that, you're going to have to go get the incremental worker from another job. How do you get the incremental worker from another job? You pay them to move to your job," Cohn said, suggesting wages will naturally be elevated when employers can no longer easily find new workers.
With hiring and job creation slowing down and 6 million job openings in the economy at the end of April, some analysts believe the labor market is already considerably tight.
Friday's evidence of a wage uptick bolsters that assessment.
"It's been a long time coming, but more consumers are finally riding the wave of plentiful job opportunities, rising incomes and improving net worth," Scott Anderson, a chief economist and executive vice president at Bank of the West, wrote in a research note Friday. "Slowing price inflation for retail gasoline, cellphone plans and groceries should provide another boost to consumers' real spending power this quarter.
"Despite the weak start to the year and disappointing earnings from some retailers, don't count out the U.S. consumer. Consumer spending is still on a solid growth path."
Andrew Soergel is an Economy Reporter at U.S. News. You can connect with him on LinkedIn, follow him on Twitter or email him at asoergel@usnews.com.
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