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Consumer spending fell in April, May; first two-month decline in two years

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

Consumer spending failed to budge from April to May, evidence that high gas prices and unemployment are squeezing household budgets. When adjusted for inflation, spending actually dropped 0.1 percent 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 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month.

Neil Dutta, an economist at Bank of America Merrill Lynch, noted 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."

Wall Street took the dismal consumer spending report in stride. Investors seemed more focused on encouraging news on Europe's debt crisis: French banks agreed to let Greece repay some of its debt more slowly.

The Dow Jones industrial average gained 108 points Monday. Broader indexes also increased.

Consumer spending is important because it accounts for 70 percent of economic activity. The spike 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 note that the slowdown in spending was partly the result of temporary factors.

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

The economy expanded at an annual rate of 1.9 percent in the January-March period. An Associated Press survey of 38 top economists predicts that the growth rate will be about 2.3 percent in the current April-June quarter. They are more optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace.

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 percent in May, after increasing 0.3 percent or higher in each of the previous five months.

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

Americans boosted their savings a bit in May, keeping 5 percent of their after-tax income. That is up from 4.9 percent in April.

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