Consumer Spending Rebounds as Income Jumps

Thursday, 27 Jun 2013 08:37 AM

 

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U.S. consumers spent more in May as their income rose, encouraging signs after a slow start to the year. But spending was weaker in April, February and January than previously estimated.

The Commerce Department said Thursday that consumer spending rose 0.3 percent last month, nearly erasing a similar decline in April. Income rose 0.5 percent.

At the same time, economists said the downward revisions to spending for 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 he thinks growth has slowed in the second quarter at an annual rate of just 1.5 percent. That's down from his previous forecast of a 2 percent rate. Economists at Barclays have cut their forecast from an annual rate of 1.8 percent to a sluggish rate of 1.4 percent.

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.

Dales also noted that the inflation gauge the Fed watches most closely has dropped to a record low of 1.1 percent, well below the Fed's 2 percent target. When inflation falls too low, the Fed normally keeps rates low to try to boost prices.

Economists are hopeful that growth will pick up in the second half of the year, and some recent data have been encouraging. Consumers, benefiting from low inflation, spent more at retail businesses in May, notably for 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 5½ years.

Still, on Wednesday the government downgraded 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 that 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.

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 This material may not be published, broadcast, rewritten or redistributed.

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