Consumer spending stagnated in May as gas prices take toll

For the first time in a year, Americans have stopped spending more.

Consumer spending failed to budge from April to May, evidence that high gasoline prices and unemployment are squeezing household budgets. When adjusted for inflation, spending dropped 0.1% last month, the Commerce Department reported Monday.

April’s consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first two-month decline in inflation-adjusted spending since April 2009.

Incomes rose 0.3% for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1% in May, after falling by the same amount in the previous month.

Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January.

“It was a very poor report all around,” he said. “I think it’s clear that higher gasoline prices are taking a bite out of consumer spending.”

Consumer spending is important because it accounts for 70% of economic activity. The surge in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less money to spend.

Economists noted that the slowdown in spending was partly the result of temporary factors.

Auto purchases fell sharply in May. That lowered spending on long-lasting manufactured goods 1.5%, the steepest drop since September 2009. Auto dealers had limited supplies of many cars because of a parts shortage stemming from the Japanese earthquake and tsunami. U.S. factories are expected to begin producing more cars once Japan’s factories resume more normal operations.

Gas prices peaked in early May at a national average of nearly $4 a gallon. Since then they have dropped to a national average of $3.57 a gallon, according to AAA’s daily fuel gauge. Cheaper gas probably will allow consumers to spend more freely this summer and fall, which should boost growth in the second half of the year.

The consumer spending report also showed that prices are increasing across many goods and services. A key inflation gauge followed by the Federal Reserve rose 0.2% in May, after increasing 0.3% or higher in each of the previous five months.

But excluding the volatile food and energy categories, inflation rose 0.3% in May, the most since October 2009.

Americans boosted their savings a bit in May. They kept 5% of their after-tax income, up from 4.9% in April.