U.S. Economy: Spending Rose More Than Anticipated

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 percent rise in purchases was the biggest since November, as Americans bought furniture, clothes and electronics after filling their autos' gas tanks, the Commerce Department said today in Washington. Incomes grew 1.9 percent, 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 percent 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 today.

``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 percent in May, the Commerce Department figures showed.

Treasuries were higher, with the benchmark 10-year note yielding 3.99 percent as of 11:29 a.m. in New York, down 4 basis points from yesterday. The Standard & Poor's 500 index was down 0.1 percent at 1,282.24.

`Holiday From Reality'

``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 spending would rise 0.7 percent, according to the median of 72 estimates in a Bloomberg News survey. The spending estimate for April was revised up to 0.4 percent from an originally reported 0.2 percent increase.

Gross domestic product may increase about 2 percent in the second quarter, Low said, before shrinking in the final three months of the year. Economists at Morgan Stanley estimated the expansion may be 1.6 percent in April to June, up from a previous estimate of 0.8 percent.

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

Fed's Preference

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

The price measure was up 2.1 percent from May 2007, also less than anticipated. Wages and salaries grew just 0.3 percent in May, the Commerce Department figures showed.

Adjusted for inflation, spending rose 0.4 percent, the biggest gain since December 2006.

Because the increase in spending was smaller than the gain in incomes, the savings rate jumped to 5 percent, the highest since March 1995, from 0.4 percent in April.

Fed policy makers this week kept the benchmark rate unchanged at 2 percent, ending a series of rate cuts, and said higher energy costs threatened to boost inflation. Still, they maintained a forecast that prices would ``moderate'' later this year, according to their statement.

`Diminished' Risk

Policy makers also said that ``although downside risks to growth remain, they appear to have diminished somewhat,'' partly as a result of ``some firming in household spending.''

A Commerce report earlier this month showed retail sales rose more than twice as much as forecast in May. Private surveys indicate the spending splurge continued this month as discounters, including Wal-Mart Stores Inc. and Costco Wholesale Corp., offered rebate-linked promotions.

About $48.1 billion worth of tax rebate checks were distributed in May and a total of $78.3 billion have gone out through today, according to the Treasury Department. Almost all of the tax rebates will be sent out by the second week of July, according to Treasury spokesman Andrew DeSouza.

There are signs the boost will not last. American Express Co. Chief Executive Officer Kenneth Chenault this week said credit indicators have deteriorated beyond the company's expectations.

Brunswick Woes

The rebates aren't large enough to benefit manufacturers like Brunswick Corp., the maker of Sea Ray yachts and Boston Whaler fishing boats. The Lake Forest, Illinois-based company said yesterday it plans to close four more North American plants and may fire as much as 10 percent of its workforce after U.S. powerboat sales fell to the lowest in more than 40 years.

Conditions in the energy, housing and labor markets ``continue to erode U.S. consumers' confidence and are reducing their ability and desire to purchase discretionary items,'' Chief Executive Officer Dustan McCoy said in a statement.

Record gasoline prices are also causing Americans to scale back travel plans. The number of travelers over the U.S. Fourth of July holiday will decline for the first time this decade, motoring group AAA said yesterday.