Best Financial Markets Analysis Article Real consumer spending fell 0.13% in May following a downwardly revised 0.06% drop in the prior month. Rising gasoline prices have adversely affected consumer spending; purchases of gasoline (nominal) declined in May, the first decline since November. Purchases of cars have dropped for three consecutive months, reflecting the supply chain problem from the natural disaster in Japan that has reduced the availability of cars (see Chart 2).

Excluding these two special factors (autos and gasoline), real consumer spending has held nearly steady for three consecutive months (see Chart 3).

The April-May readings of consumer spending bode poorly for second quarter consumer spending. Conservative assumptions about consumer expenditures in June yield a 0.8% annualized increase in consumer spending in the second quarter of 2011, down from a 2.2% gain in the first quarter. The soft consumer spending numbers support expectations of only a nearly 2-1/2% increase in real GDP in the second quarter.

The personal saving rate rose slightly to 5.0% in May, after holding steady at 4.9% in the March-April period. Personal income advanced 0.3% in May, after a similar increase in the prior month. The personal consumption expenditure price index and the core personal consumption expenditure price index (which excludes food and energy) moved up 2.5% and 1.2 on a year-to-year basis, respectively, in May (see Chart 4). The upward trend of the price measures are indicative of the Fed succeeding in preventing deflation through QE2. Going forward, given projections of soft economic growth and the absence of strong credit growth, inflation is not a threat.

Asha Bangalore — Senior Vice President and Economist

http://www.northerntrust.com

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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