U.S. consumer spending up 0.3 percent in May
WASHINGTON – U.S. consumers spent more in May as their income increased, encouraging signs after a slow start to the year.
The Commerce Department said Thursday that consumer spending rose 0.3 percent last month, nearly erasing a similar decline in April. But the government also said spending was weaker in April, February and January than previously estimated.
Income rose 0.5 percent in May, much better than the 0.1 percent April increase. Still, after-tax income has risen just 1.1 percent over the past year after taking inflation into account.
Americans chose to put a little more away last month, too. The savings rate rose to 3.2 percent in May, up from 3 percent in April. That was the highest since December.
Consumers are benefiting from low inflation. A measure of prices ticked up just 1 percent in May compared with a year ago, well below the Federal Reserve 2 percent target. Some Fed critics believe the central bank should be considering further support for the economy to guard against deflation, a destabilizing period of falling prices.
Consumer spending is watched closely because it accounts for 70 percent of economic activity.
Economists said the downward revisions to three of the first four months of the year signal weaker growth in the April-June quarter, which ends this week.
Paul Dales, senior U.S. economist at Capital Economics, said his group now expects growth has slowed in the second quarter at an annual rate of just 1.5 percent. That's down from its previous forecast of a 2 percent rate.
Economists at Barclays cut their forecast from a rate of 1.8 percent to 1.4 percent.
The government on Wednesday reduced its estimate for growth in the January-March quarter to a 1.8 percent annual rate, sharply below its previous estimate of a 2.4 percent rate. The main reason for the revision was consumer spent less than initially estimated. Some economists said the revision suggested an increase in Social Security taxes this year was squeezing consumers more than expected.
The tax increase has lowered take-home pay for most Americans. A person earning $50,000 a year has about $1,000 less to spend this year. A high-earning couple has up to $4,500 less to spend.
Tepid growth could keep the Federal Reserve from scaling back its bond purchases later this year. Chairman Ben Bernanke spooked investors last week when he said the Fed will likely slow its bond-buying this year if the economy continues to strengthen. But Bernanke added that if the economy weakens, the Fed won't hesitate to delay its pullback or even step up its bond purchases again.
The bond purchases have helped keep interest rates low.
Economists are hopeful that growth will pick up in the second half of the year and recent data have been encouraging.
Consumers spent more at retail businesses in May, buying more on cars, home improvements and sporting goods. U.S. factories are fielding more orders. Higher home sales and prices are signaling a steady housing recovery. And employers added 175,000 jobs last month, in line with the average job growth over the past 12 months.
Steady job growth has lowered the unemployment rate to 7.6 percent, down from 10 percent in 2009. And this week the Conference Board said a better job market helped lift Americans' confidence in the economy rose to the highest level in 5 ½ years..