Originally created 06/29/02

Consumer spending down slightly in May



WASHINGTON -- Consumers trimmed their spending in May by 0.1 percent, the first decrease in six months, as unusually cool weather chilled their appetite to go out and shop. Incomes rose modestly.

The pullback came after consumers increased their spending by a solid 0.6 percent in April, the Commerce Department reported Friday. Economists were predicting a slightly bigger 0.2 percent drop in spending in May.

Consumers - whose spending accounts for two-thirds of all economic activity in the United States - especially cut back on big-ticket items, such as cars, as some free-financing offers and other incentives waned.

"In spite of having their wallets fattened, households didn't find it burning a hole," said economist Joel Naroff of Naroff Economic Advisors.

On Wall Street, investors shrugged off the report. The Dow Jones industrial average was up 47 points and the Nasdaq gained 16 points in morning trading.

How consumers behave in the coming months will be crucial to how the unfolding economic recovery ultimately shapes up.

Federal Reserve Chairman Alan Greenspan worries that consumers who spent throughout the recession won't have a lot of pent-up demand coming out of it, making for a less than sizzling recovery.

Americans' incomes - including wages, interest and government benefits, went up 0.3 percent in May, matching many analysts' expectations. That followed a 0.2 percent advance in April.

Citing uncertainties about the recovery's vitality, Fed policy-makers left short-term interest rates at 40-year lows Wednesday, the fourth time this year they opted to hold rates steady.

With interest rates remaining low, consumers might be motivated to spend more and businesses motivated to boost investment in new plants and equipment. Both are crucial ingredients in the recovery.

Americans' confidence in the economy fell in June to a four-month low, pulled down by accounting scandals and worries about jobs.

And, economists worry that fallout from the latest accounting scandal, involving telecommunications giant WorldCom, could not only jolt confidence but also chill consumers' willingness to spend. It also could make companies even more wary of making big commitments, including capital investments and hiring.

In May, consumers cut back on their spending for big-tickets items, such as cars and appliances, by 2.4 percent, following a revised 0.4 percent increase in April, which was weaker than the government previously reported.

Spending on nondurable goods, such as food and clothes, fell by 0.7 percent in May, after a 1 percent increase. Spending for services rose 0.7 percent, up from a 0.3 percent increase.

The 0.1 percent drop in overall consumer spending in May was the first decline since a 0.3 percent decrease in November.

Disposable incomes - income after taxes - grew by 0.3 percent in May for the second month in a row.

Because disposable incomes grew more quickly than spending in May, the nation's personal savings rates, which is savings as a percentage of after-tax income, rose to 3.1 percent.