Americans Spend at Weakest Pace in 20 Months

Monday, 27 Jun 2011 09:03 AM

 

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Americans spent in May at the weakest pace in 20 months, a sign that high gas prices and unemployment are holding back the economy.

Consumer spending was unchanged, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010.

Incomes rose 0.3 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month.

Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January.

"It was a very poor report all around," he said. "I think it's clear that higher gasoline prices are taking a bite out of consumer spending."

Wall Street took the dismal consumer spending report in stride. Investors seemed more focused on encouraging news on Europe's debt crisis — French banks agreed to let Greece repay some of its debt more slowly.

The Dow Jones industrial average gained more than 50 points in the first hour of trading. Broader indexes also increased.

Consumer spending is important because it accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less money to spend.

Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months. That followed three months in which employers hired an average of 220,000 net new workers each month. The unemployment rate rose to 9.1 percent last month.

The economy expanded at an annual rate of 1.9 percent in the January-March period. Many economists believe that growth is only slightly better in the current April-June period.

An Associated Press survey of 38 top economists predicts that the growth rate will be about 2.3 percent in the current quarter. Economists are more optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace.

Gas prices have eased since peaking in early May at a national average of nearly $4 per gallon. In the past two months they have dropped to a national average of $3.57 per gallon, according to AAA's daily fuel gauge.

And U.S. factories are expected to begin producing more once Japan's factories resume more normal operations. The March 11 earthquake and tsunami in that country has led to a parts shortage, particularly for auto and electronics manufacturers.

Still, growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

The consumer spending report also showed that prices are increasing across many goods and services. A key inflation gauge followed by the Federal Reserve rose 0.2 percent in May, after increasing 0.3 percent or higher in each of the previous five months.

But excluding the volatile food and energy categories, inflation rose 0.3 percent in May, the most since October 2009.

Americans boosted their savings a bit in May, keeping 5 percent of their after-tax income. That is up from 4.9 percent in April.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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