Although consumer sentiment dropped slightly in early June, spending likely picked up, potentially leading to increased demand for inventory financing among U.S. small- to medium-sized retailers.
In advance of the U.S. Department of Commerce's report, economists surveyed by Bloomberg project a median increase of 0.3 percent in consumer spending during May, which would be the highest boost in three months. The economists also expect incomes to rise 0.2 percent.
"The economy continues to get better, the housing market is getting better and that's spilling over into consumer confidence," Joel Naroff, president of Naroff Economic Advisors, told Bloomberg. "They're spending more and that's keeping growth at a modest to moderate pace."
Spending gain a surprise after sentiment dropped in mid-June
The rise in consumer spending could be somewhat unexpected, as consumers reported feeling less confident in their personal financial situations earlier this month.
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment declined to 82.7 in June from 84.5 in the previous month, which was a six-year high.
Hiring gains along with increasing equity and home prices have been pushing confidence higher, but the economy might need to improve on the 175,000 jobs added in May to further raise sentiment.
"The stock market peaked in late May, so you may be seeing some of that being reflected in the number," Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., told the news source. "In general, the consumer is in a relatively good position."
Another sign that confidence took a hit in June was the decline in the weekly Bloomberg Consumer Comfort Index, which dropped to a two-month low of minus-31.3.
Rising home prices helping fuel consumer spending
One of the biggest factors that has helped lead to increased consumer spending is continuous home value appreciation.
May home values were up 0.5 percent when compared to April, and 5.4 percent year-over-year, with the Zillow Home Value Index hitting $159,000. This was the second-highest annual rate of appreciation in the past year, and home values have now jumped or remained flat for 19 consecutive months.
More than half of all the metros covered by Zillow experienced appreciation between April and May, with Sacramento posting the largest gain, followed closely by Las Vegas and Los Angeles.
Values are expected to continue to rise in the next year, despite coming down to a more sustainable level. During the 12-month period ending May 2014, values will increase 4.1 percent, the Zillow Home Value Forecast reported.
"Enjoy it while it lasts, because the housing market will undoubtedly look very different a few years down the road from how it appears now," said Zillow chief economist Stan Humphries. "Inventory constraints are beginning to ease in many areas as more listings and new homes come on line, which will ultimately help end this period of rapid annual home value appreciation above 5 percent."
Despite dipping to an appreciation rate of 4 percent, consumers can still reap the benefits, potentially leading to more spending.
Inventory financing may be increasingly needed with heightened consumer spending
With spending picking up, small-to medium sized retailers could begin to see high sales levels. As product is coming off the shelves, these businesses will likely need to replenish inventory.
Smaller companies often struggle to obtain a loan from a bank to pay for additional product, which is where inventory financing can come in handy.
This form of asset-based lending enables retailers to use current product as collateral to obtain a revolving line of credit, which can then be used to purchase inventory to keep shelves stocked.