Consumer spending up, savings at 8-month high

WASHINGTON Mon Jun 28, 2010 5:00pm EDT

Shoppers browse items in an aisle at Target in Falls Church, Virginia in this May 28, 2010 file photo. REUTERS/Kevin Lamarque

Shoppers browse items in an aisle at Target in Falls Church, Virginia in this May 28, 2010 file photo.

Credit: Reuters/Kevin Lamarque

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WASHINGTON (Reuters) - U.S. consumer spending rose moderately in May, even as savings touched the highest level in eight months, indicating a tepid economic recovery was still intact.

The data on Monday helped to allay fears that consumers, key to reviving the economy following the longest and deepest slump in 70 years, were retreating.

"Consumers are spending at a reasonably solid pace, but are still conservative. With two months of the (second) quarter in hand, consumers are at roughly the same pace of spending growth as we saw in the first quarter," said Julia Coronado, an economist at BNP Paribas in New York.

Spending increased 0.2 percent after going flat in April, the Commerce Department said. That was a touch above market expectations for 0.1 percent. Adjusted for inflation, spending was up 0.3 percent.

Investors, however, continued to worry about the recovery's strength. A string of recent data, including a report showing retail sales had slumped in May, implied it was slackening.

Wall Street stocks ended flat to modestly lower after a volatile session. Prices for U.S. government bonds soared, driving benchmark yields -- which move inversely to prices -- to one-year lows.

The U.S. dollar strengthened against a basket of currencies as potential funding tensions in Europe weighed on the euro.

The government on Friday said consumer spending, which normally accounts for 70 percent of U.S. economic activity, rose at a 3 percent pace in the January-March quarter -- slower than the official estimate of 3.5 percent in May.

That contributed to the government's gauge of first-quarter growth being trimmed to an annual rate of 2.7 percent from 3 percent.


Despite the recent batch of weak data, Federal Reserve officials on Monday saw the recovery remaining on course.

"The expansion is on track," Jeffrey Lacker, President of the Richmond Federal Reserve Bank told Reuters in an interview.

"Consumer spending continues to expand at a reasonably strong pace given the circumstances. We continue to see strength in business spending on equipment and software. Those are going to bring the economy forward," he said.

Households' spending capacity is being restrained by stubbornly high unemployment, but analysts believe it will remain on a solid footing through the year as the labor market steadily improves.

Last month, an increase in jobs and longer working hours helped lift incomes. Incomes rose 0.4 percent after gaining 0.5 percent in April, the Commerce Department said.

Adjusted for inflation and taxes, incomes climbed 0.5 percent following a 0.6 percent increase the prior month.

"The underlying recovery in employment, which we think continued in June, and hours worked is boosting households' finances," said Paul Dales, a U.S. economist at Capital Economics in Toronto.

Payrolls increased 431,000 in May, boosted by the hiring of 411,000 temporary workers to complete the 2010 Census.

According to a Reuters survey, employment probably fell 110,000 this month as more than half of the census workers recruited in May were laid off.

But private hiring, considered a better gauge of labor market health, likely picked up after unexpectedly slowing in May. This should help to sustain spending and support the fragile economic recovery, analysts say.

With incomes outpacing spending, the savings rate rose to 4 percent last month from 3.8 percent in April. Savings increased to an annualized $454.3 billion, the highest level since September.

The report on spending showed inflation pressures remain muted. The personal consumption expenditures price index was flat for a second month in a row, while the core price index, which excludes food and energy costs, rose 0.2 percent.

The core price index, closely eyed by officials at the Fed, was up 1.3 percent in the 12 months to May. Most officials at the central bank would prefer to see it closer to 2 percent.

The Fed last week left overnight lending rates in a zero to 0.25 percent range and renewed its commitment to an ultra low interest rate policy, saying inflation was "likely to be subdued for some time."

Separately, a measure of national economic activity slipped last month, but remained above levels historically linked to a mature economic recovery following a recession.

The Chicago Federal Reserve Bank said its national activity index fell to 0.21 from 0.25 in April. The three-month moving average indicated limited inflationary pressure over the coming year, the Chicago Fed said.

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Comments (2)
Recovery for who? We still have 9.5% unemployment and that does not count the rest of us who do not get the benefits without a job. The government is phonying up numbers.

Jun 28, 2010 10:02am EDT  --  Report as abuse
timOregon wrote:
Just to put this into real numbers. People spent $.02 more per dollar. Wow… So if you spent $2000 the month before you now spent $2040. Lets see it is summer time spending always goes up in the summer time as the kids are out of school and families start to travel. Construction starts to pick up.

I am not one of the unemployed however see the need for Unemployment extensions… The fact that Congress cannot find other cuts is unacceptable; they always go after what is needed the most and save their pet projects and Wall Street friends.

Congress needs to be held accountable for the their failure to create a jobs bill and a jobs market. Extending Unemployment is not the answer however it what is needed now.

The Answer is to create jobs, which will take Congress placing higher taxes on any company that out sources jobs over seas, higher taxes on any funds leaving the US and higher tariffs on imports. Until then we have to pay out unemployment for the failure of our leaders.

Support unemployment here, it is one of highest all time petitions. a_tier_v_added_ to_unemployment _benefits

Jun 28, 2010 12:32pm EDT  --  Report as abuse
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