Consumer spending hits lull

ECONOMY: Spike in gas prices, unemployment blamed for slight decline.

For the first time in a year, Americans have stopped spending more.

Consumer spending failed to budge from April to May, evidence that high gas prices and unemployment are squeezing household budgets.

When adjusted for inflation, spending actually dropped 0.1 percent last month, the Commerce Department reported Monday.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first two-month decline in inflation-adjusted spending since April 2009.

Incomes rose 0.3 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month.

Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January.

"It was a very poor report all around," he said.

"I think it's clear that higher gasoline prices are taking a bite out of consumer spending."

Consumer spending is important because it accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less

money to spend.

Growth must be stronger to significantly lower the unemployment rate. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

The consumer spending report also showed that prices are increasing across many goods and services.

A key inflation gauge followed by the Federal Reserve rose 0.2 percent in May, after increasing 0.3 percent or higher in each of the previous five months.

But excluding the volatile food and energy categories, inflation rose 0.3 percent in May, the most since October 2009.

Americans boosted their savings a bit in May, keeping 5 percent of their after-tax income. That is up from 4.9 percent in April.

Source: http://www.dailynews.com/news/ci_18363433?source=rss

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