WASHINGTON – Consumers rediscovered their appetite for shopping in June, boosting spending by a strong 0.8 percent. It was fresh testament to the economy's momentum as it headed into the third quarter.
The monthly increase in spending, reported by the Commerce Department (search) on Tuesday, came after consumers tightened their belts in May, leaving spending flat.
Consumer spending plays a key role in shaping economic activity and thus is closely watched by Federal Reserve Chairman Alan Greenspan (search) and other economists.
Incomes, the fuel for future spending, grew at a nice clip of 0.5 percent in June, better than the 0.2 percent gain registered in the previous month. The pickup in income growth dovetailed with an improvement in the jobs climate in June, when the unemployment rate fell to 5 percent, a nearly four-year low.
Both the increase in incomes and in spending were the largest since April. The spending and income figures are not adjusted for inflation.
The performance in consumer spending and income growth in June was in line with analysts' expectations. Before the release of the report, they were forecasting spending to rise by 0.8 percent and incomes to increase by 0.4 percent.
With spending outpacing income growth, the personal savings rate — savings as a percentage of after-tax income — dropped from 0.4 percent in May to zero in June. That was the worst showing since October 2001, when the savings rate fell into negative territory — posting a 0.2 percent decline, a record low.
Economists, however, cautioned that the picture of savings isn't as bad as it looks. The savings rate doesn't provide a complete picture of household finances because it doesn't capture gains from such things as real estate or financial investments.
High energy prices didn't crimp consumer spending in June.
Consumers boosted spending on big-ticket goods, including cars and appliances, by 2.9 percent, compared with a spending cut of that size in May. Spending on nondurables such as food and clothes went up by 0.7 percent in June after dipping by 0.2 percent the month before. Spending on services rose 0.5 percent in June, following a 0.6 percent in May.
Consumers did their part to keep the economy moving ahead at a nice clip of 3.4 percent in the April-to-June quarter as a whole, the government reported last week. Analysts believe the economy will do even better in the current quarter if businesses replenish inventories.
One of the main forces tempering economic growth in the second quarter was that businesses cut back on inventories. That chopped 2.3 percentage points from economic growth during the second quarter.
Wanting to make sure expanding economic activity and rising energy prices don't fan inflation, Federal Reserve policy-makers are expected to bump up interest rates by another quarter percentage point when they meet next Tuesday.
Such a move would mark the tenth increase of that size since the Fed began to tighten credit in June 2004.