Consumer Spending Slows

Friday, June 30th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — Americans, whose buying binges have powered economic growth, spent cautiously in May for the second month in a row, another tentative sign that the robust economy may be slowing.

Consumer spending rose by just 0.2 percent in both April and May, the Commerce Department said Friday. That is an enormously vital indicator of the rate of growth in the world's largest economy, because personal spending accounts for two-thirds of economic activity.

May's spending increase matched many analysts' expectations. April's figure was revised down from a 0.4 percent rise the government reported last month.

``It appears as if there really is some caution developing in the spending habits of consumers,'' said economist Joel Naroff of Naroff Economic Advisors. ``The love affair with SUVs, new kitchens and other big-ticket items seems to be waning.''

The Federal Reserve has boosted interest rates six times in the last 12 months to slow the economy and keep inflation under control. The Fed's rate increases are designed to make borrowing more expensive and cool demand for such big-ticket items as cars and homes.

On Wednesday, the Fed, citing preliminary signs of slowing, decided not to raise rates for a seventh time but left the door open to further rate increases should inflation worsen.

Friday's report also showed that Americans' spending on durable goods — such as cars and other costly manufactured goods expected to last at least three years — fell 1 percent in May. That followed a 0.7 percent drop the month before.

``Consumers are rediscovering the virtues of thrift, at least for a couple of months,'' said Paul Taylor, chief economist for the National Automobile Dealers Association.

Spending on nondurable goods, such as food and fuel, rose a slim 0.2 percent after a 0.2 percent decline in April.

Meanwhile, Americans' incomes, which include wages, interest and government benefits, rose 0.4 percent last month, slightly faster than the 0.3 percent gain many analysts were forecasting.

In April, incomes rose 0.6 percent, a little slower than the government previously thought.

With incomes rising faster than spending in May, the nation's personal savings rate was lifted to its highest point since the beginning of the year.

The personal savings rate — savings as a percentage of after-tax income — rose to 0.6 percent in May from 0.4 percent the month before. Last month's rate was the highest since 0.8 percent in January.

Even with the rise, the rate may not provide a clear picture of savings, economists have said. That's because the calculation doesn't take into account gains realized from such things as rising stocks and higher real-estate values.

Friday's report and other recent economic data suggest the Fed's interest rate increases are working to slow the economy, economists said.

The nation's unemployment rate rose to 4.1 percent in May from a 30-year low of 3.9 percent in April. Economists said people may feel less inclined to spend if they aren't working. And retail sales were lackluster in April and May.

But another report Friday offered a conflicting sign on where the economy is headed.

The Purchasing Management Association of Chicago said its index of business activity in the Midwest rose a higher-than-expected 56.8 in June, up from 53.9 in May. A reading above 50 indicates expansion in the manufacturing sector.

The Chicago report is considered a precursor of the closely watched national purchasing managers report, due out Monday.

Still, many economists believe the economy, which grew at a 5.5 percent annual rate in the first quarter of this year, slowed to a rate of 4 percent or less in the current quarter.