June 26 (Bloomberg) -- Consumer spending rose for the first time in three
months in May as incomes jumped by the most in a year, a sign that government
efforts to revive the economy may be starting to pay off.
The 0.3 percent gain in purchases followed no change in April, the Commerce
Department said today in Washington. Incomes surged 1.4 percent, reflecting tax
cuts and Social Security payments from the Obama administration’s stimulus and
driving up the savings rate to a 15-year high.
Government efforts to restore the flow of credit and prop up incomes are
making it possible for consumers to spend even as unemployment climbs to levels
last seen in the early 1980s. The loss of wealth caused by the worst housing
slump in seven decades will prompt households to keep rebuilding savings,
indicating an economic recovery will be slow to develop.
“Consumer spending has largely stabilized,” said James O’Sullivan, a senior
economist at UBS Securities LLC in Stamford, Connecticut. Stimulus-related
measures “have contributed to increasing spending power. It sets the stage for
more growth in consumption, and should help jumpstart the economy. Ultimately,
we need the labor market to kick in as well,” he said.
Treasuries, Stocks
Treasuries advanced after the report, which also showed that inflation slowed
last month. Yields on benchmark 10-year notes slipped to 3.50 percent at 9:05
a.m. in New York, from 3.54 percent late yesterday. Futures on the Standard &
Poor’s 500 Stock Index were down 0.5 percent at 912.30.
Economists had forecast spending would rise 0.3 percent, after an originally
reported 0.1 percent drop in April, according to the median of 76 estimates in
a Bloomberg News survey. Projections ranged from no change to a 0.6 percent
increase.
Wages and salaries dropped 0.1 percent in May, showing the effects of mounting
job losses.
Today’s report also showed inflation moderated. The price gauge tied to
spending patterns rose 0.1 percent from May 2008, the smallest gain since
records began in 1959. The Federal Reserve’s preferred gauge of prices, which
excludes food and fuel, rose 0.1 percent from a month earlier and was up 1.8
percent from a year earlier.
Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent
drop the prior month.
Savings Climb
Because the increase in spending was smaller than the gain in incomes, the
savings rate surged to 6.9 percent, the highest level since December 1993. The
rate may drop back in coming months as the effects of the stimulus wane.
Disposable income, or the money left over after taxes, increased 1.6 percent,
after climbing 1.3 percent the previous month. Adjusted for inflation,
disposable income also rose 1.6 percent.
Inflation-adjusted spending on durable goods, such as autos, furniture, and
other long-lasting items, gained 0.9 percent last month after falling 1.3
percent in April.
U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the
prior month. Industry estimates for June show the rate may exceed 10 million
for the first time this year.
Consumer purchases of non-durable goods increased 0.4 percent after dropping
0.4 percent, today’s report showed.
Spending on services, the largest category, was unchanged in May.
Consumer Spending
Consumer spending, which accounts for about 70 percent of the economy, rose in
the first quarter at a 1.4 percent rate after falling in the last half of 2008
by the most since 1980, according to revised figures from Commerce yesterday.
The economy shrank at a 5.5 percent annual rate from January to March, the
revisions also showed.
Purchases may drop at a 0.6 percent annual rate this quarter before growing
again in the second half of the year, according to economists surveyed by
Bloomberg this month.
Job losses are one reason for the projected decline. The unemployment rate,
which reached a 25-year high of 9.4 percent last month, probably rose to 9.6
percent in June, economists predicted ahead of the government’s monthly jobs
report due next week. The rate may climb to 10 percent by year-end, according
to the survey.
Still companies like Hertz Global Holdings Inc. are among those seeing an
improvement. The second-largest U.S. rental-car company yesterday forecast it
will return to profit in the second quarter, after declines in business and
consumer travel triggered two consecutive quarters of losses.
“Our car rental demand in the U.S. and Europe has stabilized,” Chairman and
Chief Executive Officer Mark Frissora said in a statement. Summer peak
reservations are “better-than- anticipated.”
Other retailers report Americans aren’t splurging. Kroger Co., the U.S.
grocery chain that also operates Ralphs and Food 4 Less stores, said
lower-priced store brands drew customers, helping lift first-quarter profit by
13 percent.
“Shoppers remain cautious in this economy, and we do not anticipate that
changing anytime soon,” Chief Executive Officer David Dillon said on a
conference call with analysts this week.
To contact the reporter on this story: Shobhana Chandra in Washington at
schand...@bloomberg.net
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