Personal Income Rose Slightly in May; Consumer Spending Nearly Flat

Stock market gets mild lift as American consumers adapt to more moderate spending patterns

Personal income in May increased slightly, at 0.4%, and consumer spending also rose, but at an even slower rate of 0.2%, the U.S. Department of Commerce reported Monday, June 28.

In comparison, income in April increased 0.5% while spending stayed flat at less than 0.1%, according to the department's Bureau of Economic Analysis release.

"There are general trends going on which are positive for the economy as a whole, but these numbers aren't showing a dynamic upturn in growth led by the consumer," said Steve Blitz, senior economist with New York-based Majestic Research.

The takeaway from the personal income and consumer spending numbers is that Americans who are employed may be earning higher wages, but they are still hesitant about spending their additional money as they pay off debt and try to recapture their pre-recession net worth levels.

Stocks rose slightly on the news and remained higher in mid-afternoon trading, with the Dow Jones industrial average about 26 points higher at 10,170.

Analysts' consensus was for an even slower 0.1% rate of increase for consumer spending compared to the 0.2% rate reported by the Commerce Department.

Until a few months ago, Blitz said, many Americans were spending their savings and relying on unemployment insurance to fuel their consumption, because spending habits tend to lag income as people "keep up appearances even though their income is off. "

But Americans are now recognizing the permanent downshift in their income, which is why they're making a permanent downshift in their spending habits.

"What we have seen in the last several months is an interesting turn," Blitz said. "From the private sector we're seeing growth in wages of about 0.4% a month, which is a good number. But people are also beginning to recognize that their saving rates need to rise because their personal balance sheets are overleveraged. Equity on homes is depressed and not going down anytime soon, and stocks can't be relied on because they're down a long way from their pre-recession peak."

We can expect consumer spending to remain modest for now, Blitz added.

"Household net worth is still far below where it was," he said. "The asset side of the balance sheet is not growing, which means consumers will spend moderately as they rebuild savings. Consumers are reducing spending because they are paying off their debts."

Read a story about April personal income and consumer spending from the archives of InvestmentAdvisor.com.

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