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The Honolulu Advertiser
Posted on: Saturday, July 1, 2006

High gas costs stifle consumer spending

By Martin Crutsinger
Associated Press

WASHINGTON Consumer spending slowed sharply in May as rising gasoline prices left Americans with less cash for other items, the government reported yesterday.

The Commerce Department said that spending rose by just 0.4 percent in May after a 0.7 percent gain in April. Income growth also slowed to an advance of just 0.4 percent in May, reflecting weaker job growth.

The report on personal incomes and consumer spending provided further evidence that the economy slowed sharply in the spring as Americans were battered by rising gasoline prices, higher interest rates and a cooling housing market.

In a second report, the University of Michigan said that its index of consumer sentiment rebounded a bit in June, rising to 84.9. While that was up from 79.1 in May, it still was well below the reading of 96.0 in June 2005.

The government reported Thursday that the overall economy raced ahead at an annual rate of 5.6 percent in the January-March quarter, the fastest pace in 2 1/2 years. Analysts believe growth has slowed to just half that amount in the current April-June quarter reflecting a sharp slowdown in consumer spending, which accounts for two-thirds of total economic activity.

Inflation, as measured by a price gauge tied to consumer spending, rose by 0.4 percent in May and was up 0.2 percent when energy and food prices are excluded. This measure of core inflation is up 2.1 percent when compared to May 2005, slightly above the Fed's upper bounds for core inflation of 2 percent.

The 0.4 percent increase in consumer spending in May, which was in line with Wall Street expectations, was the slowest increase in three months. Excluding price increases, spending was up an even weaker 0.1 percent in May, down from a 0.2 percent rise in inflation-adjusted spending in April.

The difference in the actual spending and inflation-adjusted spending reflected the fact that consumers were having to pay more to fill up their gas tanks. Gasoline prices hit a high for this year of $2.95 per gallon in early May, according to the Lundberg Survey.

The 0.4 percent rise in incomes was down sharply from a 0.7 percent April gain, reflecting the fact that payroll growth slowed to just 75,000 new jobs in May, another sign that the economy is shifting to a lower gear.

After paying taxes, Americans saw their incomes go up by 0.3 percent, half of the 0.6 percent April gain. After adjusting for inflation, after-tax incomes did not rise at all in May, the third month of weakness in this area.

Americans' personal savings rate, the amount of saving left from disposable income, dipped to a negative 1.7 percent in May, down from a negative 1.6 percent in April. The savings rate has been negative for 12 consecutive months, meaning that Americans are dipping into savings or borrowing more to finance a spending level that is exceeding their after-tax incomes.