May incomes surge, but savings outpace spending

WASHINGTON -- Households pushed their savings rate to the highest level in more than 15 years in May as a big boost in incomes from the government's stimulus program was devoted more to bolstering nest eggs than increased spending.

The Commerce Department said Friday that consumer spending rose 0.3% in May, in line with expectations. But incomes jumped 1.4%, the biggest gain in a year and easily outpacing the 0.3% increase that economists expected.

The savings rate, which was hovering near zero in early 2008, surged to 6.9%, the highest since December 1993.

Another report said consumer confidence rose in June to the highest since February 2008, as expectations grew that the recession may be ending.

The income increase reflected temporary factors relating to the $787 billion economic stimulus program that President Obama pushed through Congress in February to fight the recession. That program included one-time payments to people receiving Social Security and other government pension benefits.

The stimulus package also featured reductions in payroll tax withholding designed to get people to start spending more money and boost the economy. Those factors helped increase after-tax incomes 1.6% in May. However, without the special factors, after-tax incomes would have risen just 0.2%.

The savings rate, which is a percentage of disposable income, rose to 6.9% from 5.6% in April. Last month's savings rate was far above recent annual rates, which dipped below 1% from 2005 through 2007 as a booming economy and soaring home prices pushed Americans to spend most of what they earned.

Those factors have been reversed amid the longest recession since World War II. Triggered by a housing bust, the downturn has depressed home prices by the largest amounts since the Great Depression.

Economists believe that a rise in personal savings rate is a good development in the long run, but they worry that it could make the rebound from the recession slower than it otherwise would have been.

However, the 0.3% rise in spending in May was viewed as encouraging after no change in April and a 0.3% drop in March. April had originally been reported as a drop of 0.1%. It was the best monthly performance since spending rose by 0.4% in February.

Consumer spending is closely watched because it accounts for about 70% of total economic activity. Economists are hoping that improved spending will help support a rebound in economic activity.

The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June was at 70.8 from 68.7 in May, equaling February 2008's reading.

This was above economists' median expectation for a reading of 69.0, according to a Reuters poll.

Since the November 2008 low of 55.3, the sentiment index has gained 15.5 points, recouping about one-third of the loss posted since the peak in January 2007.

"Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon, as consumers begin to increase their spending on houses, vehicles, and large household durables," the Reuters/University of Michigan Surveys of Consumers said in a statement.

The government reported Wednesday that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 5.5% in the January-March quarter, slightly less severe than the 5.7% decline estimated a month ago.

However, the 5.5% drop in the first quarter followed a 6.3% decline in the last three months of last year, the worst six-month performance for the GDP in more than a half-century.

Economists believe that the 0.3% rise in spending in May will help bolster the economy in the second quarter and will translate into a smaller drop in GDP of around 2% during this period. Economists believe that GDP will begin growing again in the second half of this year, signaling an end to the recession that began in December 2007.

However, the rebound is expected to be subdued. That's because the nation's unemployment rate, already at a 25-year high of 9.4%, is expected to continue rising, pushing worried households to save even more against the threat of further layoffs.

Reduced spending has been tough on the nation's retailers, who have been forced to lay off workers and shut stores. Drugstore operator Rite Aid said Wednesday that it narrowed its fiscal first-quarter loss by closing stores and trimming other operating costs as it works to eliminate $6 billion in debt.

Still, the weak economy has kept a lid on prices. An inflation gauge tied to consumer spending edged up 0.1% in May compared with April.