Consumer Spending in U.S. Increased in May More Than Forecast

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By Bob Willis

June 28 (Bloomberg) -- Consumer spending in the U.S. rose in May more than forecast, a sign households are gaining confidence in the recovery and the job market.

Purchases rose 0.2 percent after little change the prior month, Commerce Department figures showed today. Incomes climbed 0.4 and the savings rate increased to the highest level in eight months.

Demand may accelerate as gains in payrolls, longer workweeks and rising pay are giving Americans the means to spend. Federal Reserve policy makers last week pledged to keep interest rates low to ensure households weather the fallout from the European debt crisis, unemployment hovering near a 26-year high and tight credit.

“The labor market is gradually improving, labor income is picking up and that should continue to support spending,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said before the report. “We see a solid, trend-like growth in spending” in coming months.

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.

The median estimate of economists surveyed called for a 0.5 percent advance in incomes. Wages and salaries in May rose 0.5 percent for a second month.

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

Prices Stabilizing

The report showed inflation was stabilizing. 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.

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.

‘Less Cautious’

“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.”

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