June 27 (Bloomberg) -- U.S. consumer spending rose in May as discounting and optimism about the economy's prospects helped lift sales, government figures showed. The 0.1 percent rise in spending matched the revised April increase, the Commerce Department said in Washington. Adjusted for a decline in prices, consumer spending increased 0.3 percent for a second month. Incomes rose 0.3 percent after increasing a revised 0.2 percent.
The end of major combat in Iraq helped boost consumer confidence to a six-month high in May, while firmer stock prices, cheaper financing and the prospect of lower income taxes led to a higher-than-expected reading this month. That suggests that spending may be poised to accelerate in the second half of 2003, economists said. The numbers are ``very encouraging and probably better to come'' in the next six months, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York. Federal Reserve policy makers this week lowered their target for the benchmark interest rate to a 45-year low in a bid to give the economy an additional boost. The personal consumption expenditures price index, a measure of inflation tied to spending and watched by Fed Chairman Alan Greenspan and other central bankers, fell 0.1 percent last month.
Core Inflation
Excluding food and energy, the PCE index was unchanged in May and is 1.2 percent higher than it was in the same month last year. That's the lowest since a 1 percent year-over-year rise in September 2001, when terrorists attacked the U.S. Excluding that month, the May year-over-year change was the smallest since the 12 months ended October 1965, Commerce said. Central bankers lowered their target for the benchmark overnight bank lending rate a quarter percentage point to 1 percent this week saying that an ``unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level.'' The target is the lowest since July 1958. Economists had expected a 0.2 percent increase in spending not adjusted for changes in prices after a previously reported 0.1 percent drop in April, based on the median of 64 estimates in a Bloomberg News survey. They had also expected incomes to rise 0.3 percent following no change that had been previously reported for April. Spending on services, which account for half of the report, increased 0.5 percent, the biggest increase since January, after rising 0.3 percent in April. Spending on durable goods such as autos, appliances, and other big-ticket, long-lasting items, fell 0.7 percent in May after rising 2.7 percent the prior month, today's report showed.
Housing's Benefits
Spending on non-durable goods fell 0.1 percent after falling 1.3 percent. New home sales rose to a record last month and purchases of previously-owned homes were stronger than expected as the lowest mortgage rates in history helped make buying more affordable, reports this week showed. ``The strength if the housing market is boosting big-ticket purchases,'' said Adrienne Warren, a senior economist at Scotia Capital in Toronto, before the report. Furniture sales rose 1.1 percent last month following a 0.5 percent increase in April, while electronics and appliance purchases jumped 2.9 percent on the heels of a 0.8 percent rise, according to the Commerce Department figures on retail sales released earlier this month. Wal-Mart Stores Inc., the world's largest retailer, said this week that U.S. sales at stores open at least a year are rising within its June forecast of a 2 percent to 4 percent increase. Bentonville, Arkansas-based Wal-Mart said shoppers bought more groceries, girls' clothing and tools last week.
Tax Cut
Lower income tax withholding rates are slated to take effect next month as part of the government's $330 billion tax cut. In addition, some families will be receiving checks representing a larger deduction for those with dependent children. The extra cash is prompting some economists to hike growth estimates for the second half of the year. ``Most of the acceleration is likely to occur in consumer spending, which should benefit from the sharp decline in interest rates and substantial tax cuts,'' said Jan Hatzius, an economist at Goldman, Sachs & Co. in New York.
Most of the improvement will come in the fourth quarter and continue into next year, according to revisions made last week to the firm's forecasts. Goldman economists now expect the economy will grow at a 4 percent annual apace in the last three months of the year, compared with a previous forecast of 2.5 percent. That would follow 3 percent growth projected for the third quarter, which was not changed. For all of 2004, the economy is expected to expand 3.3 percent compared with a previous estimate of 2.5 percent.
Confident
A report by the New York-based Conference Board earlier this week showed that June consumer confidence fell less than expected this month after reaching a six-month high in May. The index measuring expectations for the economy six months from now rose to the highest since September. Disposable income, or the money left over after taxes, increased 0.3 percent in May following a 0.2 percent rise the previous month. Wages and salaries increased 0.2 percent after no change in April. The personal savings rate was 3.5 percent in May, up from 3.4 percent in April. The indicator weighs current income from wages, salaries, businesses and government payments against spending. It doesn't account for borrowed money, income from investments, or withdrawals from prior savings.//www.bloomberg.com