Consumer spending up 0.3 percent in May

WASHINGTON U.S. 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 Thursday that consumer spending rose 0.3 percent last month. That made up for a 0.3 percent 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 percent increase in purchases of durable goods such as autos.

Income rose 0.5 percent in May, the biggest gain since February and much better than the 0.1 percent April increase. Even with the gain, after-tax income is up just 1.1 percent over the past year after taking inflation into account.

Americans chose to put a little more away last month, too. The savings rate rose to 3.2 percent in May, up from 3 percent in April. That was the highest since December.

And consumers are also benefiting from low inflation. A measure of prices ticked up just 1 percent in May compared with a year ago, well below the Federal Reserve 2 percent target. Some Fed critics believe the central bank should be considering further support for the economy to guard against deflation, a destabilizing period of falling prices.

Consumer spending is watched closely because it accounts for 70 percent of economic activity. The increase in May could calm new fears that higher taxes are having a bigger impact on Americans' spending power.

"This is a relatively good report," said Chris Christopher, an economist at IHS Global Insight. "Recent news on the consumer front has been favorable. Consumer confidence is gaining ground, pump prices are 'relatively' low, and housing is looking brighter. Looking ahead, we expect real consumer spending to increase around 2.0% for the entire year."

The government on Wednesday cut its estimate for growth in the January-March quarter to a 1.8 percent annual rate, sharply below its previous estimate of a 2.4 percent 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. A person earning $50,000 a year has about $1,000 less to spend this year. A high-earning couple has up to $4,500 less to spend.

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 won't hesitate to delay its pullback or even step up its bond purchases again.

The bond purchases have helped keep interest rates low.

Economists say overall economic growth will likely stayed slow for the next few months as consumers and businesses adjust to the higher taxes and deep federal spending cuts. But many think growth will pick up in the final three months of this year, helped by further job gains and a stronger housing recovery.

The latest data have been positive.

Consumers spent more at retail businesses in May, buying more on cars, home improvements and sporting goods. U.S. factories are fielding more orders. Higher home sales and prices are signaling a steady housing recovery. And employers added 175,000 jobs last month, in line with the average job growth over the past 12 months.

Steady job growth has lowered the unemployment rate to 7.6 percent, down from 10 percent in 2009. And this week the Conference Board said a better job market helped lift Americans' confidence in the economy rose to the highest level in 5 1/2 years.