Consumers Keep Spending, Spurring Hopes of Recovery

WASHINGTON â€”  Consumers, a key force in 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.

The latest batch of economic news Monday offered encouraging signs for an economy that has been stuck in low gear since last 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.�

Consumer spending, which accounts for two-thirds of all economic activity, rose in May for the second month in a row by 0.5%, 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% 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 Assn. of Purchasing Management said its purchasing index rose to 44.7% from 42.1% in May. An index above 50 signifies growth in manufacturing, while a figure below 50 shows contraction. June’s 44.7% reading was the highest since 47.9% 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% in May, following a 0.4% 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.

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

Spending on nondurable goods such as clothes and food rose 0.5%, compared with an April increase of 1%. Spending on services grew by 0.3% for the second month in a row.

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% in April to a negative 1.3% 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.

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

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Purchasing Managers Index

June: 44.7

Source: National Assn. of Purchasing Management

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Personal Income

Seasonally adjusted annual

rate, in trillions of dollars:

*

May: $?.?? trillion

Source: Commerce Department