Consumers Cut Spending, Keep Cash

WASHINGTON – U.S. consumers trimmed their spending slightly in May, breaking a string of five consecutive monthly gains as they stayed away from auto showrooms, the government said on Friday.

Personal spending fell 0.1 percent last month -- the first drop since November -- after posting a revised 0.6 percent rise in April, the Commerce Department reported. The department said the dip was largely due to a decline in auto sales.

While spending dropped, income rose 0.3 percent in May after a revised 0.2 percent gain a month earlier. It was the sixth consecutive monthly increase in income and offered hope that the pullback in consumer spending, which accounts for two-thirds of U.S. economic activity, would prove temporary.

Earlier this month, the department reported a drop in retail sales in May that raised concerns the consumer spending, which kept the economy from sinking too deeply into recession last year, might be slipping. But reports since then have shown retail activity perking up in the early weeks of June.

"It looks like the slowdown in May was mostly temporary, and we're on a little stronger path now," said Doug Lee of Economics from Washington.

While a dismal stock market performance has raised fears consumers might retrench, economists said moderate income growth, low interest rates and lower energy prices should underpin spending.

"It would appear that consumers are going to be able to underwrite at least a moderate recovery," said Lynn Reaser, chief economist at Banc of America Capital Management. "The dividing factor between a weak recovery and a stronger performance will be the ... business side in terms of capital spending."

Markets shrugged off Friday's report, which matched expectations on Wall Street.

The report showed spending on durable goods -- costly manufactured items designed to last three years or more -- fell 2.4 percent in May, pulled down by a decline in auto sales. Automakers had said sales dipped about 6 percent last month.

Spending on non-durable items dropped 0.7 percent, while outlays for services rose 0.7 percent.

The report offered good news on inflation. The so-called PCE price index, which is closely watched by Federal Reserve Chairman Alan Greenspan, slipped 0.1 percent. That was the first drop in the index since December and came on the heels of a 0.4 percent April gain.

With inflation largely under wraps, the Fed has had room to hold interest rates at four-decade lows in an effort to breathe more life into an economy emerging unevenly from recession.

On Wednesday, after its last meeting on rates, the Fed reiterated its view that risks to the economy were evenly balanced between the potential for a flare-up in inflation and economic weakness.

The central bank expressed a guarded optimism on the economy's prospects, saying it expected it to gather strength but the degree of strengthening remained uncertain.

The May drop in consumer spending, combined with the increase in income, led to a gain in the personal saving rate, which climbed to 3.1 percent of disposable income from 2.8 percent in April.