Personal after-tax income shot up a record 3.4% in May as Americans recovered from a huge tax bite in April, the government reported Thursday.
Personal savings, which tumbled to an all-time low in April as Americans dipped into savings to pay their taxes, recovered as well, giving encouragement that consumers will resume at least a moderate spending pace in months ahead.
After-tax disposable income had plummeted 2.7% in April, the biggest decline in 12 years. The higher-than-usual tax bills covered profits made at the end of last year as Americans sold long-term investments. The profit-taking was spurred by the overhaul of the tax laws which raised the government's take on long-term capital gains beginning Jan. 1.
Before taking taxes into account, personal income rose a slight 0.2% in May following a 0.4% April gain.
The Commerce Department reported that consumer spending edged up just 0.1% following a much faster 0.6% advance in April. The swings in both months were attributed to auto sales.
Consumer spending, which accounts for two-thirds of overall economic activity, has supplied most of the power to keep the economy moving since the 1981-82 recession. But while consumer spending rose 4.1% last year, analysts are looking for just half of that gain in 1987 as auto sales weaken further and housing sales decline because of rising mortgage rates.
Purchases of durable goods, including autos, fell at an annual rate of $5.9 billion during May.
General Motors announced Thursday that it was expanding its rebate and cut-rate financing incentives to six additional Chevrolet passenger car lines in an effort to spur sales.
But David Wyss, an economist with Data Resources Inc., predicted that the new incentive programs would have little effect.
"The new rebate programs haven't captured people's imaginations," he said. "But despite the weakness in autos and housing, consumers seem to be spending their hearts out in other areas, just like they have done for the past two years."
In May, personal consumption spending for non-durable goods rose at an annual rate of $1.2 billion while consumer purchases of services, which have been strong all year, climbed at a rate of $6.2 billion.
Douglas Cliggot, economist for the New York investment firm Merrill Lynch & Co., said spending this year would be held back by higher inflation, which will cut into workers' modest income gains.
"Consumer spending will be restrained by a slower increase in income but it will be enough to keep us out of a recession as long as we get the continued improvement in the trade area that we are expecting," he said.
Economists are counting on higher export sales by American manufacturers to make up for weaker domestic demand this year.
The savings rate--savings as a percentage of disposable income--had plummeted to an all-time low of 0.1% in April because of the tax bills but climbed back in May to 3.3%. While this is still a historically low level, economists said they expect consumers will continue spending, rather than trying to build their savings any higher.
Wages and salaries, the key component in income, increased $8.8 billion in May, slightly faster than the $7-billion rate of increase in April.