Last Updated- Jun 26, 2009 15:37 - - 0 Comments


US incomes rise as stimulus kicks in

Personal income in the US surged in May thanks to an infusion of government stimulus funds, while consumers raised their spending modestly as confidence about the state of the economy continues to improve.

However, most of the monthly rise was the result of Federal benefit transfers and lower taxes. Americans, still facing rising job cuts and falling home prices, have been hoarding most of the additional funds, lifting the savings rate to a 16-year high in May.

“Households are reverting to a more sustainable spending path vis-à-vis income that allows scope for paying down debt and adding to savings,” said Joshua Shapiro, chief US economist at MFR.

Official figures showed on Friday that incomes jumped by 1.4 per cent last month, or $167.1bn, beating economists’ expectations and doubling the previous month’s revised rise of 0.7 per cent.

Personal consumption expenditure rose by 0.3 per cent or $25.1bn last month, in line with estimates, and a rebound from April’s pull-back.

The sharp rise in spending was mainly due to benefits payments doled out through the American Recovery and Reinvestment Act of 2009, which provides one-time payments of $250 to people who receive social security funds, veterans’ benefits or railroad retirement income. Although disposable personal income, which factors out taxes, rose by 1.6 per cent in May, it increased by just 0.2 per cent without the stimulus benefits.

Companies are still facing severe pressure from the fall-off in demand, leading many to freeze or slash pay and hours to avoid further job cuts. In spite of the overall increase income increase in May, wages and salaries fell by 0.1 per cent last month.

Richard Moody, chief economist at Forward Capital, notes that wages and salaries fell in the first quarter of this year compared with the first three months of 2008, marking the first such decline since 1958.

“Until there is meaningful and sustained improvement in labour market conditions, there will be no significant, sustained rebound in consumer spending,” Mr Moody said.

Earlier this week the Federal Open Market Committee said in its latest statement that although household spending has shown signs of stabilisation, it remains “constrained by ongoing job losses, lower housing wealth, and tight credit”.

The commerce department’s closely-watched gauge of prices rose by 0.1 per cent for the second consecutive month in May, easing fears that stimulus measures will fuel inflation. Excluding food and energy, prices were also up by 0.1 per cent, down from April’s 0.3 per cent increase.

Meanwhile the savings rate, which is measured as the proportion of income left after spending and taxes, rose to 6.9 per cent last month, up from a revised 5.6 per cent, bringing it to the highest level since December 1993.

Some economists predict that the savings rate could reach as high as 10 per cent as the recession has caused a collapse in household wealth, while others argue that the stimulus will continue to spur spending.

Separately on Friday, the latest reading from the Reuters/University of Michigan consumer survey found that confidence rose from 68.7 in May to 70.8 in June, its highest level in 16 months. It was the fourth consecutive monthly increase and exceeded expectations.

The rise was driven by a sharp increase in sentiment about current conditions due to the recent stock market rally and signs of stability in the housing market.

Source: FT

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