WASHINGTON - American 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 increased spending.
The U.S. Commerce Department said Friday that consumer 
rose 0.3 per cent in May, in line with expectations. But incomes jumped 1.4 per cent, the biggest gain in a year and easily outpacing the 0.3 per cent increase that economists expected.
The savings rate, which was hovering near zero in early 2008, surged to 6.9 per cent, the highest level since December 1993.
The income increase reflected temporary factors relating to the US$787-billion economic stimulus program that President Barack 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 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 per cent in May. However, without the special factors, after-tax incomes would have risen just 0.2 per cent.
The savings rate, which is a percentage of disposable income, rose to 6.9 per cent from 5.6 per cent in April. Last month's savings rate was far above recent annual rates, which dipped below one per cent 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 the Second World War. Triggered by a housing bust, the downturn has depressed home prices by the largest amounts since the Great Depression.
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 per cent rise in spending in May was viewed as encouraging after no change in April and a 0.3 per cent drop in March. April had originally been reported as a drop of 0.1 per cent. It was the best monthly performance since spending rose by 0.4 per cent in February.
Consumer spending is closely watched because it accounts for about 70 per cent 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 per cent in the January-March quarter, slightly less severe than the 5.7 per cent decline estimated a month ago.
However, the 5.5 per cent drop in the first quarter followed a 6.3 per cent 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 per cent 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 two per cent during this period. Economists believe that GDP will begin growing again in the second half of this year, signalling an end to the recession that began in December 2007.
However, the rebound is expected to be subdued. That's because unemployment, already at a 25-year high of 9.4 per cent, 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 per cent in May compared with April.
© The Canadian Press, 2005