Consumer Spending Rises 1 Percent in May

Consumers — the lifeblood of the economy — boosted their spending in May by the largest amount in more than two years, an encouraging sign for the recovery's strength.

The Commerce Department (search) 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.

Americans' incomes, meanwhile, went up by a strong 0.6 percent in May for the second straight month. The growth in incomes in the last two months was especially heartening because that powers spending in the future. The income and spending figures are not adjusted for price changes.

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

The latest snapshot of consumer behavior was better than economists were expecting. They were forecasting a 0.8 percent increase in spending and a 0.5 percent rise in income growth.

When the spending figures are adjusted for inflation, consumer spending rose by a more modest 0.4 percent in May after being flat in April.

With the recovery firmly rooted and jobs picking up, economists widely expect the Federal Reserve (search) to 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 (search), which now sits at a 46-year low of 1 percent.

Fed Chairman Alan Greenspan (search) 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 3.5 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.

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.

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.