US consumers spent more in May as their income increased at the fastest pace in three months, gains that could help economic growth rebound.
The Commerce Department said today that consumer spending rose 0.3% last month. That made up for a 0.3% decline in April, which was the biggest drop since the fall of 2009.
The rise in spending was due in part to a 0.9% increase in purchases of durable goods such as cars. Income rose 0.5% in May, the biggest gain since February and much better than the 0.1% April increase.
Even with the gain, after-tax income is up just 1.1% over the past year after taking inflation into account.
Americans also chose to put a little more away last month, with the savings rate rising to 3.2% in May, up from 3% in April and the highest rate since December.
US consumers are also benefiting from low inflation. A measure of prices ticked up just 1% in May compared with a year ago, well below the Federal Reserve 2% target. Some Fed critics believe it should be considering further support for the economy to guard against deflation, a destabilising period of falling prices.
Consumer spending is watched closely because it accounts for 70% of economic activity in the US. The increase in May could calm new fears that higher taxes are having a bigger impact on Americans' spending power.
The US government yesterday cut its estimate for growth in the January-March quarter to a 1.8% annual rate, sharply below its previous estimate of a 2.4% rate. The main reason for the revision was consumer spent less than initially estimated.
Some economists said the revision suggested 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.
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 will not hesitate to delay its pullback or even step up its bond purchases again.
US unemployment benefit applications fall
The number of Americans seeking unemployment benefits fell 9,000 to a seasonally adjusted 346,000 last week, evidence that the job market is still improving modestly, despite signs of slower growth.
The four-week average, a less volatile figure, declined 2,750 to 345,750, the Labor Department said today. That is near the five-year low of 338,000 that the average touched last month.
Applications are a proxy for layoffs and since March, they have fluctuated between 340,000 and 360,000, a level consistent with steady hiring. Employers added 175,000 jobs in May, almost matching the average monthly gain for the past year.
