There is mounting evidence the economy's steep slide into recession has slowed significantly.
Americans' personal income rose $3.1 billion in May to a seasonally adjusted annual rate of $2.070 trillion compared with a $3 billion drop in April, the Commerce Department reported yesterday.
Moreover, personal outlays fell at only a $3 billion annual rate last month following a $16.8 billion rate of decline in April, the department said.
Separately, Commerce also reported that housing starts dropped 11 percent in May to a seasonally adjusted annual rate of only 920,000 units from 1.039 million the month before. But the numbers of building permits issued rose slightly, suggesting that housing construction may not drop much further.
Even before the latest statistics were out, economist Alan Greenspan noted, "There are some good omens beginning to emerge which suggest that the economy's rate of decline may be subsiding in June."
That does not mean the low point of the recession has been reached, Greenspan and other economists stressed, but rather that the period of "free fall" in which the economy has been contracting sharply month by month likely is over.
The economic decline so far has centered on autos and homebuilding, both of which seem to have hit bottom. For instance, Greenspan said sales of domestically produced cars were running at a 5.5 million seasonally adjusted annual rate in the first 10 days of June, "their best performance since the third 10 days of April." The building permits data implies housing starts could rise slightly in June.
Meanwhile, supplier industries to autos and homebuilding, such as steel, aluminum and lumber, probably are approaching their low points as well, according to Greenspan.
For the economy to continue to plummet as it did in April and early May, a new source of weakness has to appear. A build-up of unwanted inventories could lead to additional cuts in production of a wide range of goods as the holders of those stocks try to get them in line with low sales. The inventory problem could worsen if orders for capital goods bought by business begin to evaporate.
Greenspan expects just such a weakness in orders placed by businesses for new equipment to develop in the third quarter of the year. But he nevertheless believes the overall decline in the economy will be substantially smaller in the next three months than in the current quarter, which probably will show a drop in the gross national product at an annual rate of 8 percent or so.
George Perry of the Brookings Institution is less sanguine than Greenspan because he expects a larger inventory correction in the third quarter. But he, too, says "you're not going to continue to get a string of months with industrial production failling 2 percentage points each time."
Perry added, "Unemployment (benefit) claims are still rising rapidly."
Even in the face of a big increase in the number of people out of work last month -- the unemployment rate climbed from 7 percent in April to 7.8 percent in May -- total wages and salaries paid fell only at a $1.1 billion annual rate, the Commerce Department said. In April they had dropped at a $6.7 billion rate.
The much smaller drop in personal outlays reflected, in part, a much smaller month-to-month rise in Americans' personal savings rate. After rising about 0.8 percentage point to a 4.7 percent rate in April, it rose only to 4.9 percent in May.
At the same time, consumers were getting the benefit of a major improvement in inflation. The deflator for personal consumption expenditures, which is a measure of the change in prices of goods and services consumers actually are buying, rose only 0.6 percent in April Compared with a 1.4 percent gain in May, the department said.
Prices for durable goods did not rise at all, while prices of nondurables such as gasoline and clothing rose only 0.1 percent. The cost of services, however, jumped 0.9 percent.
As for housing starts, Michael Sumichrast, chief economist of the National Association of Homebuilders, also said residential construction is close to or at its low point. Sumichrast expects starts to begin to rise before long but only very slowly.