Personal income rose 1.2 percent in May, the largest monthly gain in two years, while personal consumption spending rose even more strongly, the Commerce Department reported yesterday.
The report underscored the current strength of the economic recovery. The department will release its so-called flash estimate for second quarter gross national product today, and most analysts expect it to show growth at more than a 6 percent annual rate after adjustment for inflation. Real GNP rose at a 2.5 percent rate in the first quarter, although revisions of that figure are also due today.
Because of higher tax and certain non-tax payments, disposable personal income increased 0.7 percent last month. That was somewhat smaller than the 0.9 percent rise in April but still above the 0.6 percent increase in March, the department said.
With consumption spending going up twice as fast as disposable personal income, the personal saving rate--expressed as a percentage of disposable personal income--dropped to 5.3 percent for May. The average during the first quarter was 5.9 percent.
Overall, personal income rose $32.3 billion to a seasonally adjusted annual rate of $2,710.9 billion. Private wages and salaries went up at a $21.1 billion rate, compared with $12.8 billion in April. However, manufacturing payrolls increased at a $4.3 billion rate, less than the $5.6 billion increase the month before.
Government wages and salaries rose at a $4.5 billion rate, with most of the increase accounted for by a retroactive pay increase at a $3.3 billion annual rate for Postal Service employes. "The payment resulted from settlement of a suit by the U.S. Department of Labor against the Postal Service for wage and overtime violations under the Fair Labor Standards Act for the period May, 1974, through May, 1978," the Commerce Department explained.
Non-farm proprietors' income rose more strongly than in April, but interest income and transfer payments went up more slowly.
Personal outlays--which include personal consumption expenditures, interest paid by consumers to business, and net personal transfer payments to foreigners--increased at a $28.5 billion rate in May, compared with $22.4 billion in April.
Purchases of durable goods, nondurable goods, and services all increased faster in May than the month before. The biggest jump was in non-durables, with buying up at a $9.4 billion rate compared with a $0.9 billion increase in April.
The gap between the increases in disposable personal income and personal consumption spending, coming at a time that the saving rate is so low, suggests that the recent spurt in consumer spending likely will taper off soon, analysts said. The cut in federal income tax withholding due July 1 will help sustain such spending, but some analysts believe a substantial portion of the higher take-home pay will be used to boost saving rather than finance continued rapid increases in spending.
Commerce Secretary Malcolm Baldrige said the "strong" income and spending gains, "themselves reflecting the economic recovery," will fuel further vigorous economic growth this summer . . . After adjustment for changes in consumer prices, wages and salaries have returned almost to their pre-recession peak."