Consumer spending rises 0.5 percent

By Jeannine Aversa
Associated Press

WASHINGTON — Consumers, a key force keeping the economy afloat, continued their vigorous spending in May. That, along with improvements in manufacturing and solid construction activity, made economists more hopeful the country will be able to skirt a recession this year.

"There's light at the end of the tunnel. It may not be a beacon but it's promising," said Richard Yamarone, economist with Argus Research Corp. "All three reports are good news and support an economic recovery."

On Wall Street, blue chips rallied on the better-than-expected economic news. The Dow Jones industrial average closed up 91 points at 10,594.

Consumer spending, which accounts for two-thirds of all economic activity, rose in May for the second month in a row by 0.5 percent, a better-than-expected showing that came despite the choppy economy and a rash of layoffs.

The Commerce Department's report also showed that Americans' incomes grew by 0.2 percent for the second straight month. The spending and income figures aren't adjusted for inflation.

"The consumer has been the economy's savior," said Joel Naroff of Naroff Economic Advisors. "Neither rain, nor heat nor lack of income will stay the consumers from their rounds of spending money."

Meanwhile, a key gauge of industrial activity in June turned in its best performance in seven months. Even with the improvement, the measure was at a level indicating that the manufacturing sector of the economy remained in recession.

The National Association of Purchasing Management said its purchasing index rose to 44.7 percent from 42.1 percent in May. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction. June's 44.7 percent reading was the highest since 47.9 percent in November.

Analysts were heartened that the index regained some lost ground and were hopeful that the worst of the manufacturing recession may be over.

"Manufacturing remains weak but is firming," said Merrill Lynch economist Stan Shipley.

In a third report, construction spending rose by a bigger-than-expected 0.3 percent in May, following a 0.4 percent rise. Lower interest rates have helped keep the industry stable during the slowdown.

All of May's strength came from spending on big government projects, such as schools and highways, and increased spending on housing.

To stave off recession, the Federal Reserve has slashed interest rates six times this year. The most recent reduction, of a quarter-point, came last week. The other five cuts were each by a bolder half-point.

Economists predict that the economy in the recently ended second quarter will probably hit its lowest point since the slowdown began in the second half of last year. Many believe the economy grew by a barely discernible rate of 0.5 percent in the April-June quarter.

Federal Reserve Chairman Alan Greenspan has said one of the biggest factors determining whether the country will skirt a recession is how well consumers hold up during the slowdown.

With yesterday's reports, economists said they are increasingly hopeful the economy will rebound near the end of the year as the Fed's interest-rate cuts and Congress tax-cut refunds take hold.

The increase in consumer spending in May was led by a 1.2 percent jump in purchases of costly manufactured goods, such as cars and washing machines. That followed a tiny 0.1 percent rise in April.

Spending on nondurable goods such as clothes and food rose 0.5 percent in May, compared with a previous 1 percent increase. Spending on services grew by 0.3 percent for the second month in a row. The services category includes such things as gas and electric utilities, visits to doctors, bus and train fares and rent for housing.

None of the spending figures are adjusted for inflation.

With spending outpacing income growth, the personal savings rate — savings as a percentage of after-tax income — dipped from a negative 1 percent in April to a negative 1.3 percent in May, matching a record monthly low set in January.

The savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real estate values or financial investments, economists say.

"Consumers are staying in red and meanwhile keeping the overall economy in the black," said National Association of Manufacturers President Jerry Jasinowski.