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MAY INCOMES SURGE, BUT SAVINGS OUTPACE SPENDING
Online Newsletter July 2009
Long Island Business News - June 26, 2009
by Henry E. Powderly II
Households pushed their savings rate to the highest level in more
than 15 years in May as a big boost in incomes from the government’s
stimulus program was devoted more to bolstering nest eggs than
The Commerce Department said Friday that consumer spending rose 0.3
percent in May, in line with expectations. But incomes jumped 1.4
percent, the biggest gain in a year and easily outpacing the 0.3
percent increase that economists expected.
The savings rate, which was hovering near zero in early 2008, surged
to 6.9 percent, the highest level since December 1993.
The income increase reflected temporary factors relating to the $787
billion economic stimulus program that President Barack Obama pushed
through Congress in February to fight the recession. That program
included one-time payments to people receiving Social Security and
other government pension benefits.
The stimulus package also featured reductions in payroll tax
withholding designed to get people to start spending more money and
boost the economy. Those factors helped increase after-tax incomes
1.6 percent in May. However, without the special factors, after-tax
incomes would have risen just 0.2 percent.
The savings rate, which is a percentage of disposable income, rose
to 6.9 percent from 5.6 percent in April. Last month’s savings rate
was far above recent annual rates, which dipped below 1 percent from
2005 through 2007 as a booming economy and soaring home prices
pushed Americans to spend most of what they earned.
Those factors have been reversed amid the longest recession since
World War II. Triggered by a housing bust, the downturn has
depressed home prices by the largest amounts since the Great
Economists believe that a rise in personal savings rate is a good
development in the long run, but they worry that it could make the
rebound from the recession slower than it otherwise would have been.
However, the 0.3 percent rise in spending in May was viewed as
encouraging after no change in April and a 0.3 percent drop in
March. April had originally been reported as a drop of 0.1 percent.
It was the best monthly performance since spending rose by 0.4
percent in February.
Consumer spending is closely watched because it accounts for about
70 percent of total economic activity. Economists are hoping that
improved spending will help support a rebound in economic activity.
The government reported Wednesday that the overall economy, as
measured by the gross domestic product, shrank at an annual rate of
5.5 percent in the January-March quarter, slightly less severe than
the 5.7 percent decline estimated a month ago.
However, the 5.5 percent drop in the first quarter followed a 6.3
percent decline in the last three months of last year, the worst
six-month performance for the GDP in more than a half-century.
Economists believe that the 0.3 percent rise in spending in May will
help bolster the economy in the second quarter and will translate
into a smaller drop in GDP of around 2 percent during this period.
Economists believe that GDP will begin growing again in the second
half of this year, signaling an end to the recession that began in
However, the rebound is expected to be subdued. That’s because
unemployment, already at a 25-year high of 9.4 percent, is expected
to continue rising, pushing worried households to save even more
against the threat of further layoffs.
Reduced spending has been tough on the nation’s retailers, who have
been forced to lay off workers and shut stores. Drugstore operator
Rite Aid Corp. said Wednesday that it narrowed its fiscal
first-quarter loss by closing stores and trimming other operating
costs as it works to eliminate $6 billion in debt.
Still, the weak economy has kept a lid on prices. An inflation gauge
tied to consumer spending edged up 0.1 percent in May compared with