Consumer Spending in U.S. Rebounds as Incomes Increase

Consumer spending in the U.S. rebounded in May following the largest drop in more than three years, a sign the economy can weather a second-quarter slowdown.

Household purchases rose 0.3 percent after a 0.3 percent decline the prior month that was the biggest since September 2009, according to Commerce Department data issued today in Washington. Other reports showed the housing recovery is gaining momentum and consumers are becoming more confident.

Rising home prices, an improving job market and bigger income gains will help households overcome the payroll-tax increase that took effect in January, propelling spending in the last six months of 2013. The pickup will be needed to overcome the effects of the automatic federal budget cuts that began in March, which are contributing to weaker growth this quarter.

“As we get further out in time and the fiscal drag fades, spending can do better,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, who correctly projected the gain in purchases. “The second quarter is looking a bit softer, but the economy should show some improvement.”

Stocks rose, sending the Standard & Poor’s 500 Index to its biggest three-day rally since January, as the data indicated Federal Reserve policy makers can continue to provide additional stimulus to the economy. The S&P 500 climbed 0.6 percent to 1,613.2 at the close in New York.

Incomes advanced 0.5 percent in May following a 0.1 percent gain the prior month, the Commerce Department’s report also showed. The median forecast in a Bloomberg survey economist projected a 0.2 percent increase.

Incomes Climb

Real disposable income, or the money left over after taxes adjusted for inflation, increased 0.4 percent after growing 0.3 percent in the prior month.

Americans were able to rebuild nest eggs as the gain in income exceeded the increase in spending. The saving rate increased to 3.2 percent, the highest so far this year, from 3 percent in April.

Consumers elsewhere aren’t doing as well. Britons’ disposable income plunged in the first three months of the year by the most in more than a quarter of a century, putting pressure on an economy trying to recover from stagnant growth, figures in London showed today.

The gain in U.S. consumer spending for May matched the median estimate of 83 economists surveyed by Bloomberg. Projections ranged from gains of 0.1 percent to 0.7 percent.

Growth Outlook

Adjusting for inflation, which renders the figures used to calculate gross domestic product, consumer purchases rose 0.2 percent in May after a 0.1 percent decrease in the previous month, today’s Commerce Department report showed. The government had previously estimated demand climbed 0.1 percent in April.

The downward revision to April’s reading prompted some economists to cut forecasts for consumer spending, which accounts for about 70 percent of the economy. Analysts at Morgan Stanley in New York reduced their tracking estimate for second-quarter personal outlays down to an annualized rate of 1.5 percent from 1.7 percent. They also lowered the GDP estimate to 1.5 percent from 1.6 percent.

Revised data from the Commerce Department yesterday showed the world’s largest economy grew at a 1.8 percent annualized rate in the first three months of the year as consumer spending climbed at a 2.6 percent pace. Both estimates were lower than previously calculated.

Gaining Confidence

Rising confidence signals demand may strengthen. The Bloomberg Consumer Comfort Index increased last week to minus 28.3, its highest level since January 2008, from minus 29.4 a week earlier. A measure of the buying climate rose for a second week as more households said the time was right to purchase needed items.

“Consumer spending will continue to be the driver of the recovery,” said Tom Simons, an economist at Jefferies LLC in New York, who accurately predicted the gain in May purchases. “The second half looks better. The labor market is continuing to improve. The housing rebound will help as well.”

More Americans signed contracts in May to buy previously owned homes than at any time in more than six years, a sign of bigger progress to come in residential real estate, figures from the National Association of Realtors showed today.

The index of pending home sales jumped 6.7 percent to 112.3, the highest since December 2006. The increase was the biggest since April 2010 and exceeded all estimates in a Bloomberg survey of economists.

Fewer Claims

A Labor Department report today also showed the number of claims for jobless benefits dropped by 9,000 to 346,000 in the week ended June 22 from a revised 355,000 the prior period. Smaller reductions in headcounts indicate employers are confident enough that demand will be sustained.

Ford Motor Co. said it is adding 2,000 workers and a third shift at its F-150 factory in Missouri to increase production of pickups beginning in the third quarter.

Cars and light trucks sold at a 15.2 million annualized rate in May, putting 2013 on course to be the best year for the industry since 2007, data from automakers show. Ascena Retail Group Inc., a holding company for five women’s clothing retailers including Justice, Dress Barn and Maurices, is one of the companies counting on confidence continuing to improve.

“We’ve seen a fair amount of consumer confidence in spending on a macro level, so it feels like the economy’s coming back,” David Jaffe, president and chief executive officer of the Suffern, New York-based company, said June 25 at a retail conference. “I feel that it is sustainable.”

A sustained expansion may mean the Fed will soon start to dial back on the amount of money it’s pumping into financial markets. The central bank will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke told reporters on June 19 after policy makers’ two-day meeting.

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