The nation's savings rate hit another all-time low in May as Americans' spending rose faster than their income. Economists said the figures, released by the government yesterday, give the Federal Reserve Board more ammunition to justify an expected interest-rate increase this week.
Consumer spending, which has repeatedly outpaced incomes this year, rose 0.6 percent in May, the Commerce Department said. Americans' personal income, which includes wages, interest and government benefits, went up 0.4 percent last month.
That trend has helped to drag the nation's savings rate -- savings as a percentage of after-tax income -- to a string of record lows this year.
In May, the savings rate fell to minus 1.2 percent, worse than the previous record of minus 1.0 percent in March and April.
The nation's economy grew at a brisk annual rate of 4.3 percent in the first three months of this year, powered by strong consumer spending.
Consumer confidence, meanwhile, is at record highs.
Even though economists believe both economic growth and consumer spending have slowed in the current quarter, they don't believe the trend is enough to dissuade the Fed from beginning to raise short-term interest rates before their two-day meeting ends tomorrow.
The Commerce Department figures "confirm what the Fed already thought . . . that consumer spending remained quite robust in May," said economist Paul Kasriel of Northern Trust Co. in Chicago. "It just reinforces their presumed decision to raise the federal funds rate" this week.
Many economists believe the Fed is likely to raise its target for the federal funds rate, the interest that banks charge one another, from 4.75 percent to 5 percent in an effort to slow the economy and keep inflation under control. That could be followed by one and possibly two more quarter-point increases in upcoming months, many analysts believe.
First Union Corp. economist David Orr said the Fed wants to raise consumers' borrowing costs so they will slow their spending and close the current gap between income growth and spending.
In May, wages rose 0.5 percent, after a 0.6 percent increase the previous month. But wages for farm proprietors dropped 13.8 percent last month.
Economists believe that one of the major reasons the savings rate is so low is that the stock market is at record highs, boosting Americans' net worth and making them feel more comfortable about spending.
Last year, 25 percent of American households' total assets were in stock investments -- the highest percentage in the postwar period, Kasriel said. "If there was a dramatic drop in the stock market, household wealth would suffer significantly, and that would probably cause people to want to save more," he said.
CAPTION: A Savings Deficit (This chart was not available)