May Incomes Grow but Spending Doesn’t

The Department of Commerce Bureau of Economic Analysis reported that personal income before taxes grew by 0.2 percent or $23.5 billion in May. Consumer spending remained flat during May with increased spending on services balanced by decreased spending on big-ticket items and non-durable goods. To put that in context, over the last 12 months real disposable personal income has increased 3.2 percent while real consumer spending has increased 3.4 percent.

The Wall Street Journal reports that previous data showed retail sales dropping 0.5 percent in May due, in part to declining demand for autos. Experts also blamed rising energy prices.

In other news, the Federal Reserve Board raised key interest rates another 0.25 percent. This ninth straight increase seems intended to keep inflation in check while the economy accelerates.

“We’re in a deceleration, but we don’t see the consumer packing up and going home,” Nariman Behavish, chief economist at Global Insight in Lexington, MA told Bloomberg. “The Fed is succeeding in what it set out to do. It’s making sure that inflation doesn’t get out of control.”

In spite of increasing incomes and interest rates, the personal savings rate remained under one percent at 0.6 percent during May. According to the Labor Department, initial applications for unemployment benefits fell for the second week in a row increasing confidence that the job market continues to grow.

“They [consumers] tend to be more aggressive about spending vs. saving. While that’s good for the overall economy in the short-term, from an individual financial planning perspective, it’s very risky,” Keith Millner, a senior vice president at Nationwide Financial Services told BusinessWeek.

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