Consumer Spending in May Increased More Than Forecast

Incomes grew faster than spending in May, making it possible for American households to simultaneously increase savings and support the economic recovery.

Consumer purchases rose 0.2 percent, exceeding the median forecast of economists surveyed by Bloomberg News, after little change the prior month, Commerce Department figures showed today. Incomes climbed 0.4 percent, and the savings rate increased to the highest level in eight months.

Gains in payrolls, longer workweeks and rising pay give Americans more confidence and the means to maintain spending in coming months. The Federal Reserve’s decision last week to keep interest rates unchanged may help households weather the fallout from the European debt crisis, unemployment hovering near a 26- year high and tight credit.

“The consumer is finally starting to see some positive wage gains as the job market starts to improve,” said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut. “Consumer spending isn’t going to propel the recovery forward, but it should be more than enough to sustain it. Overall, this was a fairly solid report.”

Stocks dropped as shares of energy producers fell in conjunction with oil prices. The Standard & Poor’s 500 Index decreased 0.2 percent to close at 1,074.57. Treasury securities jumped, sending the yield on the benchmark 10-year note down to 3.02 percent at 4:09 p.m. in New York from 3.11 percent late on June 25.

Exceeds Forecast

The median estimate of 61 economists surveyed by Bloomberg news called for a 0.1 percent gain in spending. Projections ranged from an increase of 0.3 percent to a 0.5 percent drop.

“Consumers are less cautious than they were previously,” Robert Niblock, chief executive officer at Lowe’s Cos., the second-largest home-improvement chain, said in a June 23 teleconference. “But they still know that we’re still not out of the woods yet.”

Lowe’s last month said it will add more than 1,400 positions for employees to visit customers’ homes to sell them windows, doors and other products. The retailer is filling those jobs internally and hiring new employees, Maureen Rich, a spokeswoman for the Mooresville, North Carolina-based company said in a May 28 interview.

Wages and salaries rose 0.5 percent in May for a second month and were up 1.3 percent since March, the biggest three- month gain since December 2007, the month the recession began. The median estimate of economists surveyed called for a 0.5 percent advance in incomes.

Savings Rate

The savings rate increased to 4 percent last month, the highest level since September, to $454.3 billion.

“The U.S. consumer remains resilient,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, which correctly forecast the gain in spending. “As long as jobs are coming back people will continue to spend.” Americans will also “remain focused on paying down their debts and rebuilding their savings.”

The report showed prices stabilized. The inflation gauge tied to spending patterns increased 1.9 percent from May 2009 after a 2 percent increase in the 12 months through April.

The Fed’s preferred price measure, which excludes food and fuel, rose 0.2 percent in May from the prior month, exceeding the 0.1 percent median estimate of economists surveyed.

The Fed last week said the labor market is “improving gradually,” changing April’s assessment that it was “beginning to improve.” Consumer spending still “remains constrained” by joblessness and “tight credit,” it said.

Durable Goods

Adjusted for inflation, purchases rose 0.3 percent last month after little change in April. Price-adjusted spending on durable goods, including automobiles and appliances, increased 1.1 percent after a 0.5 percent drop. Demand for nondurable goods decreased 0.2 percent, the first decline this year, while spending on services increased 0.3 percent.

Confidence among U.S. consumers rose in June to the highest level since January 2008, indicating the decline in stock prices prompted by the European debt crisis has failed to weigh on sentiment, figures from Thomson Reuters/University of Michigan showed last week. The group’s final sentiment index increased to 76 from 73.6 in May. The index has averaged 84.5 over the past decade.

Consumer spending grew at a 3 percent annual pace in the first three months of 2010, less than previously estimated, the Commerce Department said last week. The report showed the economy grew 2.7 percent in the first quarter.

Economists surveyed this month projected purchases will expand at a 3 percent rate in the April-to-June period and 2.6 percent in the second half of the year.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

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