Consumer spending exceeds forecast

From Bloomberg News

U.S. consumer spending rose more than forecast in May as tax rebates drove the biggest gain in incomes in almost three years, enabling households to at least temporarily overcome soaring fuel bills.

The 0.8% rise in purchases was the biggest since November, as Americans bought furniture, clothes and electronics after filling their gas tanks, the Commerce Department said Friday.

Incomes grew 1.9%, the most since September 2005, and measures of inflation were lower than anticipated.


The figures indicate that the fiscal stimulus will cause a pickup in economic growth this quarter after an expansion of 1% in the first three months of the year.

The gains may not last, most economists predict, as rising unemployment and gasoline prices eviscerate consumer confidence.

Sentiment among Americans fell in June to the lowest level since 1980, the Reuters/University of Michigan survey showed.

“Consumers aren’t fooled -- they know this is a temporary boost to their income,” Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an interview with Bloomberg Television.

Wages and salaries grew just 0.3% in May, the Commerce Department figures showed.

“This is the tax rebate that you’re seeing here,” Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Radio interview. “It’s a sense of hope, but it doesn’t last. Call it a holiday from reality.”

Economists had forecast that spending would rise 0.7%, according to the median of 72 estimates in a Bloomberg News survey.

The spending estimate for April was revised up to 0.4% from an originally reported 0.2% increase.

Gross domestic product may increase about 2% in the second quarter, Low said, before shrinking in the final three months of the year.

The gain in income was almost five times larger than the median forecast of a 0.4% gain. Disposable income, or the money left over after taxes, surged 5.7%, the largest increase since May 1975.

The report also contained good news on inflation for Federal Reserve policymakers. The central bankers’ preferred gauge of prices, which excludes food and fuel, increased 0.1%, compared with a 0.2% median estimate in the Bloomberg survey.

The price measure was up 2.1% from May 2007, also less than anticipated.