Income growth, spending both slow in May

Martin Crutsinger

Thursday, June 30, 2005 | 9:09 a.m.

WASHINGTON -- Personal income growth slowed sharply in May and people's spending didn't increase at all, the government reported today.

The Commerce Department said that personal incomes rose a slight 0.2 percent last month, far below the 0.6 percent increase in April. It was the weakest showing since an outright decline of 2.5 percent in January. The slowdown was attributed to the weak increase in jobs last month.

Consumer spending, which accounts for two-thirds of total economic activity, was unchanged in May after having risen by 0.6 percent in April. The slowdown in spending was attributed to unusually cold weather in May which caused retail sales to decline for the first time since last August.

In a second report, the department said that America's net debtor position rose a sharp 15.2 percent in 2004, underscoring the deterioration in the country's international balance sheets.

The United States is the world's largest debtor country with foreigners owning $2.48 trillion more in U.S. assets such as stocks, bonds and real estate than Americans own in foreign assets. In 2003, the investment gap totaled $2.15 trillion.

The big rise in the country's net international investment position reflected last year's record trade deficit, which is being financed by foreigners owning larger amounts of U.S. assets.

In a third report, the Labor Department said the number of Americans filing new claims for unemployment benefits fell last week for a second straight week, showing some strength in the labor market. The drop last week was 6,000, to a total number of new claims of 310,000, the lowest level since mid-April.

The report on incomes showed that disposable incomes, the amount left after paying taxes, rose by 0.2 percent as well in May, compared to a 0.5 percent increase in April.

Economists believe that income growth will rebound to higher levels in coming months because they think the weak gain of 78,000 jobs in May, the smallest increase since August 2003, was a temporary slowdown and not the start of new problems for the labor market.

The unchanged increase in spending reflected the fact that retail sales actually fell by 0.5 percent in May as cool weather dampened sales of summer clothes and auto sales took a tumble.

Economists believe that increased gains in employment should support a solid advance in consumer spending, which has been the mainstay of the current economic recovery.

The government reported Wednesday that the overall economy grew at a solid 3.8 percent rate in the first three months of this year, the same pace as the final three months of 2004. Economists are expecting a good performance in 2005 although at a slightly slower pace than the 4.4 percent increase in the gross domestic product for all of 2004.

An inflation gauge that is tied to consumer spending rose a modest 0.2 percent in May after a 0.1 percent increase in April. This inflation measurement, which excludes food and energy, is closely watched by officials at the Federal Reserve for signs of price pressures.

Americans' personal savings rate edged up slightly in May to 0.6 percent of disposable income, compared to 0.5 percent in April.