Consumer spending rises 0.4 percent in May; income growth also inches up 0.4 percent

(AP) Consumer spending slowed sharply in May as rising gasoline prices left Americans with less cash for other items, the government reported Friday.

The Commerce Department said that spending rose by just 0.4 percent last month after a 0.7 percent gain in April. Income growth also slowed to an advance of just 0.4 percent last month, reflecting weaker job growth.

The report on personal incomes and consumer spending provided further evidence that the economy slowed sharply in the spring as Americans were battered by rising gasoline prices, higher interest rates and a cooling housing market.

In a second report, the University of Michigan said that its index of consumer sentiment rebounded a bit in June, rising to 84.9. While that was up from 79.1 in May, it still was well below the reading of 96.0 in June 2005.

The government reported Thursday that the overall economy raced ahead at an annual rate of 5.6 percent in the January-March quarter, the fastest pace in 2 1/2 years. Analysts believe growth has slowed to just half that amount in the current April-June quarter reflecting a sharp slowdown in consumer spending, which accounts for two-thirds of total economic activity.

Inflation, as measured by a price gauge tied to consumer spending, rose by 0.4 percent in May and was up 0.2 percent when energy and food prices are excluded. This measure of core inflation is up 2.1 percent when compared to May 2005, slightly above the Fed's upper bounds for core inflation of 2 percent.

Federal Reserve Chairman Ben Bernanke sent stocks plunging in early June when he cited an increase in core inflation as an "unwelcome" development, raising worries that the Fed was going to increase interest rates several more times to fight inflation.

The Fed did boost its federal funds rate on Thursday for a 17th time to 5.25 percent. Wall Street posted the biggest one-day gain in three years on the wording of the Fed statement, which indicated that future rate increases would be dependent on incoming data.

Stocks ended a turbulent quarter with a moderate decline on Friday with the Dow Jones industrial average falling 40.58 points to close at 11,150.22, one day after posting a 215-point gain.

Many analysts said the new inflation figure in Friday's spending report increased the odds that the Fed will increase rates at least one more time at the next meeting on Aug. 8.

"We are not going back to the bad old days with regard to inflation, but it has crept up and the Fed needs to keep a lid on inflation expectations," said Nariman Behravesh, chief economist at Global Insight, a private forecasting firm.

The 0.4 percent increase in consumer spending in May, which was in line with Wall Street expectations, was the slowest increase in three months. Excluding price increases, spending was up an even weaker 0.1 percent in May, down from a 0.2 percent rise in inflation-adjusted spending in April.

The difference in the actual spending and inflation-adjusted spending reflected the fact that consumers were having to pay more to fill up their gas tanks. Gasoline prices hit a high for this year of $2.95 per gallon in early May, according to the Lundberg Survey.

The 0.4 percent rise in incomes was down sharply from a 0.7 percent April gain, reflecting the fact that payroll growth slowed to just 75,000 new jobs in May, another sign that the economy is shifting to a lower gear.

After paying taxes, Americans saw their incomes go up by 0.3 percent, half of the 0.6 percent April gain. After adjusting for inflation, after-tax incomes did not rise at all in May, the third month of weakness in this area.

Americans' personal savings rate, the amount of saving left from disposable income, dipped to a negative 1.7 percent in May, down from a negative 1.6 percent in April. The savings rate has been negative for 12 consecutive months, meaning that Americans are dipping into savings or borrowing more to finance a spending level that is exceeding their after-tax incomes.

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On the Net:

Personal income and spending: http://www.bea.gov/bea/rels.htm