U.S. consumer spending should be stronger than it has been this year. With an enormous windfall from low gasoline prices, consumers are either being cautious, choosing to save more, or there are other weights on spending that have flown under the radar, including the potential that the Great Recession altered household behavior.
Stronger vehicle sales in May don't alleviate concerns about the consumer. Consumers are spending on vehicles and travel and entertainment but not on much of anything else aside from medical care. But don't give up on the consumer (despite increased worries). Real spending is barely tracking north of 2% at an annual rate this quarter after rising 1.8% in the first three months of the year.
Fundamentals support stronger spending, and our forecast is for real consumption to rise around 4.5% in the second half of the year as consumers use more of the windfall from low gasoline prices. For argument's sake, if spending rises a less impressive 3% because fundamentals are less supportive than we think, or consumer behavior has changed, it would shave more than 1 percentage point off GDP growth per quarter.
Why the recent weakness? Here's a look at the possible explanations for the disappointing recent spending and assign a high or low risk that it will be more persistent than we anticipate.
Saving the Gasoline Windfall (probability it will prove more persistent than expected: high)