June 26 (Bloomberg) -- Consumer spending rose in May as benefits from the Obama administration’s stimulus plan spurred a jump in American incomes, a sign that efforts to revive the economy are starting to pay off.

The 0.3 percent increase in purchases was the first gain in three months, the Commerce Department said today in Washington. Earnings climbed 1.4 percent, the most in a year, driving the savings rate to a 15-year high. Another report showed consumer sentiment rose in June to the highest level since February 2008.

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. At the same time, the wealth destruction caused by the housing slump may force households to keep rebuilding savings, indicating an economic recovery will be slow to develop.

“Consumers may expand spending a little, but there are a lot of crosscurrents here,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who projected incomes would jump. “It’s still too early to look for consumers to be an engine of growth for the economy.”

Stocks and the dollar dropped after China’s central bank again called for a new global currency. The Standard & Poor’s 500 Stock Index closed down 0.2 percent at 918.90 in New York. The Japanese yen gained 0.8 percent against the dollar to 95.23 at 4:26 p.m. in New York.

Gaining Confidence

A separate report today showed consumers grew more confident in June, underscoring that the worst of the recession has passed. The Reuters/University of Michigan final index of consumer sentiment gained to 70.8 from 68.7 in May.

“There is some modest improvement to the consumer outlook,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview. The stimulus “is performing its function to get income into the system, to get the economy going and to get consumer spending going forward. We’re still, longer term, short on jobs, short on wage growth.”

The jump in incomes last month reflected tax cuts and Social Security payments from the government’s stimulus plan, the Commerce Department said. Without those benefits, wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses.

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.

Less Inflation

Today’s spending 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.

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.

Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.

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.

Auto Rebound

U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the prior month. Some 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.

“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. Ultimately, we need the labor market to kick in as well,” he said.

Household purchases, which accounts for about 70 percent of the economy, 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. Purchases rose at a 1.4 percent pace in the first quarter.

Job Losses

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.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: June 26, 2009 16:30 EDT