Americans' personal income dropped 0.5 percent in May, the first decline in more than two years and the sharpest drop since 1972, the Commerce Department reported yesterday.

Despite the drop in income, expenditures by consumers rose 0.7 percent following a 1.0 percent increase in April. Economists said the increase in spending was a good sign that the economic expansion had not petered out. However, they also said that although consumers are continuing to purchase goods, many of the goods are imports, which has impacted domestic goods producers.

The personal income figures were affected by two special factors without which personal income would have risen 0.4 percent, Commerce said. The factors were an unusually large increase in subsidy payments to farmers and a retroactive wage payment to Postal Service workers in April.

The personal income figures, even without the special factors, were below the average 0.6 percent monthly increase during the last 12 months.

The consumption figures on the other hand, "were quite good," said Robert Ortner, Commerce Department chief economist. "The consumer is holding up the economy."

"Outlays are clearly more important" than the income figures, said Alan Murray, economist with Citicorp Information Services. "The economy is showing signs of strength that I haven't seen before. It looks like consumer spending is picking up."

Personal consumption expenditures had fallen 0.2 percent in March.

Many economists said they are looking toward the release this morning of the "flash" report on gross national product to determine how large a dent imports are making in American production and whether that is where consumer spending will continue to go.

A big reason for the small 0.7 percent increase in output in the first quarter this year and the 2.2 percent average rise in the last three quarters has been the influx of imports, economists said. Many economists, however, said they expect the second-quarter estimates released today to show GNP increased between 2.5 percent and 3.0 percent between April and June.

Take-home pay -- personal income less taxes -- rose 1.6 percent in May, following a 3.3 percent increase in April. The steep rises in disposable personal income in those two months was due to issuance of tax refunds in April that normally would have been disbursed in February and March, Commerce said. It said the amount of catch-up in tax payments in April was $7.0 billion and $69.4 billion at annual rates in May.

The amount of personal saving increased in May. Savings -- disposable income less outlays -- was $182.5 billion in May, compared with $157.6 billion in April, Commerce said. Savings as a percent of disposable personal income rose from 3.6 percent in March to 5.8 percent in April and 6.6 percent in May. All the figures were affected by the way in which payment of tax refunds affected disposable income.