Americans used their bigger paychecks to spend and save more last month, a sign of growing consumer optimism as the economic recovery picks up.
On Thursday, the Commerce Department reported strong gains in personal income and consumer spending in May, with income rising by $69.4 billion, or 0.5 percent, more than double economists’ expectations. It was the largest increase since February, when it rose 1.2 percent. Disposable personal income was also higher by $57 billion, or 0.5 percent.
Consumer spending rebounded from a drop in April, rising by $29 billion, or 0.3 percent, in May, meeting analysts’ estimates.
Americans benefited from higher wages and salaries, which increased by $19.7 billion, or 33 percent, compared with April. Wage increases have been weak, even as personal income has improved. Hence, May’s rise in wages indicates that the recovery is broadening to include the slow but steady job market (the economy added 170,000 jobs last month).
“It’s a good sign, in line with our projection for stronger growth on the second half of the year,” said Steve Cunningham, director of research at the American Institute for Economic Research.
Thursday’s positive numbers come on the heels of Wednesday’s disappointing news on growth. The Commerce Department significantly lowered its estimate for economic growth for January through March, revising it to 1.8 percent from the previous 2.5 percent.
The Commerce Department also downgraded its numbers on personal income and spending for April. The revised estimates show a 0.1 percent rise in personal income in April. Spending was revised from to a decrease of 0.3 percent.
An upward revision for disposable income in April, however, was another bright, if surprising, sign that spending is picking up, Cunningham said. “Income and expenditures are coming back.”
Confidence among U.S. consumers climbed to the highest level in more than five years in June, according to data out Wednesday, beating previous estimates. The Conference Board’s consumer confidence index rose to 81.4, the highest levels since January 2008. Analysts consider a rise in consumer confidence an indication that spending will accelerate.
Americans also set a little more money aside last month, the report showed. The personal savings rate, which measures what people have left to spend after paying taxes, rose to 3.2 percent in May, compared with 3 percent in April. It was the highest increase since December, when the rate hit 7.4 percent. The amount of savings, $387.6 billion, also was the largest since December.
A low savings rate is considered to be good for the economy as consumers use more of their income to boost the business sector.
Proprietors’ income decreased $1.3 billion in May, in contrast to an increase of $1.1 billion in April. Rental income decreased $0.7 billion, compared with a decrease of $1.5 billion in April. Personal income receipts on assets (interest and dividend income) increased $31.2 billion, compared with an increase of $26.7 billion in April.