Consumer spending rises by 1 percent in May

WASHINGTON (AP) - Consumers - whose behavior plays a key role in the economy - boosted their spending in May by the largest amount in more than two years.

The Commerce Department reported Monday that consumer spending rose by a sizable 1 percent, a considerable pickup from the 0.2 percent increase registered in April. The increase in May was the largest since October 2001, when spending rebounded with gusto after being depressed by the Sept. 11 terror attacks.

"With the job outlook improving and income growing solidly, people are spending money like crazy," said economist Joel Naroff, president of Naroff Economic Advisors.

Americans' overall incomes went up by a strong 0.6 percent in May for the second straight month as did disposable incomes - what's left after taxes. The income and spending figures are not adjusted for price changes.

When adjusted for inflation, however, consumer spending rose by a more modest 0.4 percent in May after being flat in April. And disposable incomes were unchanged in May, following a 0.4 percent rise. The government does not provide a similar price-adjusted figure for Americans' overall incomes, which include wages, salaries and Social Security benefit payments.

"This spring's surge in gasoline prices has eaten up much of the recent growth in income," said Mark Vitner, economist at Wachovia. But, looking ahead, he expected energy and other prices to settle down. "We believe that ... the inflation data are poised to make a dramatic improvement in the next few weeks," he said.

An inflation gauge tied to Monday's report showed that prices rose by 0.5 percent in May, up from a 0.2 percent increase in April. Excluding food and energy prices, however, the inflation measure rose by a more tame 0.2 percent in May for the third month in a row.

On Wall Street, the Dow Jones industrials lost 14.75 points to close at 10,357.09.

With the recovery firmly rooted and jobs picking up, economists widely expect the Federal Reserve on Wednesday to boost short-term interest rates for the first time in four years. Most are forecasting a one-quarter percentage point increase in a key interest rate, which now sits at a 46-year low of 1 percent.

Fed Chairman Alan Greenspan and his colleagues are still of the view that inflation will be moderate in the months ahead, which would mean that the Fed can gradually raise rates. However, if inflation looks to be worse than forecast, then the Fed will take more aggressive action, Greenspan has said.

The economy grew at a 3.9 percent annual rate in the first quarter of this year, a slowdown from the previous quarter, but still a respectable pace.

Economic growth in the April-to-June quarter ranged from a rate of 2.5 percent to just more than 4.5 percent, according to analysts' projections. Growth would be stronger, analysts say, if not for the expectation that higher energy prices have put a crimp into consumer and business spending.

Still, Monday's report suggested that consumers are keeping their pocketbooks and wallets sufficiently open to support the economy thus far in the second quarter. But economists offered mixed opinions on just how much support would come from consumers.

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, it plays a key role in shaping an economic recovery.

Consumer spending on "durables" - costly manufactured goods such as cars and appliances - rose by 1.7 percent in May, a turnaround from the 0.6 percent decline reported for April. Spending on "nondurables," such as food and clothes, went up by 1.2 percent last month, up from a 0.1 percent dip in April. Spending on services increased by 0.7 percent in May, up from a 0.5 percent rise the month before. All those spending figures were not adjusted for inflation.

With spending outpacing income growth, the nation's personal savings rate - savings as a percentage of after-tax income - dipped to 2.2 percent in May, from 2.6 percent in April.