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Washington: US consumer spending jumped last month as government stimulus cheques boosted household budgets and pushed the saving rate to a 13-year high, but another report released on Friday showed confidence took a hit.
Commerce Department data showed US personal spending rose by a greater-than-expected 0.8 per cent in May, while a key gauge of inflation remained muted.
Some economists said the stronger spending would double the pace of US growth in the second quarter from what they had been predicting before the data. There is a question mark, however, over whether this will be sustainable.
These concerns were reinforced a short while later by the Reuters/University of Michigan Surveys of Consumers, which hit another 28-year low in June of 56.4 from May's 59.8 reading. It also showed elevated household expectations for inflation.
The Federal Reserve stepped up its warnings on inflation last Wednesday when it halted a powerful interest rate-cutting campaign, which has slashed rates by 3.25 percentage points to 2 per cent since September to shield US growth from a housing slump.
Wall Street stocks suffered after oil topped $142 per barrel and closed lower, with the Dow Jones Industrial Average surrendering almost 107 points to end at 11,347.
US government debt prices rose, benefiting from the drubbing of Wall Street stocks, while the dollar lost ground against the yen and Swiss franc on worries about growth.
Personal spending - under scrutiny as a barometer of how consumers behaved as they received a fiscal boost of $48 billion in May amid a cooling economy - had been expected to increase 0.6 per cent, according to analysts.
It was the largest increase in personal spending since November, and compared with a 0.4 per cent rise in April. Econ-omists at JPMorgan Chase & Co promptly doubled their forecast for second-quarter US growth to two per cent.
Fears
The Fed hopes consumer spending will hold up once the tax rebate cheques have been cashed. But some economists fear the economy will shift down in the third and fourth quarters as this support fades away.
"While the economy appears to be showing more strength than we had anticipated in the current quarter, there is likely to be a more powerful payback over the next couple of quarters," Morgan Stanley economists wrote in a note to clients.
The investment bank now forecasts 1.6 per cent growth in the second quarter, twice what it had estimated before the release.
The Commerce Department said personal income advanced 1.9 per cent in May, the largest gain since September 2005, and followed a 0.3 per cent increase the month before.
Disposable income jumped 5.7 per cent in May, the biggest increase since May 1975, thanks in large part to the stimulus checks. The Commerce Department said that without that boost disposable personal income would have been up 0.4 per cent.
Americans also saved much more than they had in years, with the personal saving rate jumping to five per cent last month, the highest reading since March 1995.
"We had very strong consumer spending, but most of the tax rebates went into savings, which might mean that they are going to stay there," said Pierre Ellis, senior economist at Decision Economics in New York.
The government's Econ-omic Stimulus Act, rushed into law as an emergency measure to prevent a collapsing housing market from toppling the economy into recession, will deliver an extra $107 billion to Americans this year.
The bulk of the money arrived from the end of April onward and will begin to dry up by the middle of July. The Treasury said that so far, it has sent out payments totalling slightly more than $79 billion.
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