Ahead of the Bell: Income and spending

June 26, 2009
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WASHINGTON—Consumer spending likely rose slightly in May after two straight monthly declines, which if true, would be one more sign that the worst of the recession is starting to abate.

Personal consumption spending likely rose 0.3 percent in May, after a 0.1 percent drop in April, according to the consensus view of economists surveyed by Thomson Reuters. They also expect personal incomes, the fuel for future spending, increased 0.3 percent following a 0.5 percent gain in April.

The Commerce Department will release the new report Friday at 8:30 a.m. EDT.

Consumer spending is closely watched because it accounts for about 70 percent 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 percent in the January-March quarter, slightly less severe than the 5.7 percent decline estimated a month ago.

However, the 5.5 percent rate of decline in the first quarter followed a 6.3 percent drop in the last three months of last year, the steepest six-month decline for the GDP in more than a half-century.

Economists believe a slight rebound in consumer spending in May will help limit the amount the economy is shrinking in the current quarter.

Many are looking for GDP to drop by around 2 percent in the current quarter before starting to grow again in the second half of this year. Any rebound is expected to be sluggish given other problems weighing on the economy. Those include unemployment at a 25-year high of 9.4 percent that is expected to rise further in coming months.

One development limiting growth in consumer spending has been a big increase in the personal savings rate, which jumped in April to 5.7 percent. That was the highest rate since February 1995, as households have struggled to deal with the fear of layoffs and depleted nest eggs.

Reduced spending has been tough on the nation's retailers, who have been forced to lay off workers and shut stores as the country slogs through the longest recession since World War II.

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.