Strong U.S. Income Growth Sends Savings Rate Soaring

Frugal consumers trimmed spending in April — although by less than expected — as rising unemployment kept pocketbooks in check and motivated Americans to save.

With income growth far outpacing spending, Americans’ personal savings rate zoomed to 5.7 percent, the highest since February 1995, the Commerce Department reported Monday.

Consumer spending dipped 0.1 percent in April. That was slightly less than the 0.2 percent reduction economists were expecting, although it marked the second straight month that consumers cut back. The pullback came after a burst of buying at the start of the year as shoppers took advantage of deeply discounted merchandise and other promotion.

Americans’ incomes — the fuel for future spending — jumped by 0.5 percent, following two straight months of declines. The improvement in April was due to tax cuts and benefit payments flowing from President Barack Obama’s stimulus package, the government noted. Wages and salaries, however, were flat in April.

The growth in incomes — the most since May 2008 — surprised economists. They were forecasting a 0.2 percent decline.

Others economic reports out Monday also were encouraging.

— U.S. manufacturing activity shrank at a slower pace in May. The Institute for Supply Management’s index came in at 42.8 — its highest since September and up from 40.1 in March. A reading below 50 still indicates activity contracted, but the figure beat out economists’ forecasts for a reading of 42 in May.

— Construction spending rose a surprising 0.8 percent in April, the Commerce Department said. Economists were expecting a 1.2 percent decline. It marked the second straight month that construction spending went up. Private builders also boosted spending on housing projects in April, something that hasn’t happened since August.

On Wall Street, investors looked past General Motors Corp.‘s bankruptcy filing and took hope that the economic reports drew a more upbeat picture of the global economy.

The Dow Jones industrial average rose more than 200 points, or 2.4 percent, by midmorning trading. Other major indexes also advanced more than 2 percent.

In the consumer report, while the savings rate was the highest since February 1995, the level of savings — $620.2 billion — was the most on records dating back to January 1959.

That reflects a more thrifty consumer whose wealth — notably nest eggs, investment holdings and home values — has been hard hit by the recession. It also reflects consumers being more cautious given rising unemployment.

The nation’s unemployment rate jumped to 8.9 percent in April, the highest in 25 years. Economists predict the jobless rate climbed to 9.2 percent in May as employers cut 523,000 jobs. The government releases the employment report on Friday. Since the start of the recession in December 2007, the economy has lost 5.7 million jobs.

Consumer spending accounts for roughly 70 percent of overall economic activity and is closely watched by economists.

In April, consumers trimmed spending on big-ticket “durable” goods like cars and appliances, and on “nondurables” such as clothes and food by 0.6 percent each. That was a little less than how much they reduced spending on those categories in March.

Consumers increased spending on services by 0.3 percent in April, up from 0.1 percent in March.

Most economists believe consumers in the April-to-June quarter will hold tighter to their wallets than they did in the first three months of this year.

In the first quarter, consumer spending rose at a 1.5 percent pace. It wasn’t a shopping spree by any means but it marked a big improvement from the final quarter of last year when recession-battered consumers slashed spending at a 4.3 percent pace, the most in 28 years.

Even with the expectation that consumers will be cautious, economists predict that the economy as a whole is not sinking nearly as much now as it was in the prior six months.

Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace in the April-June quarter.

Other analysts think the economic decline could be steeper — around a 3 percent pace. Some think it could be less — about a 1 percent pace.

The expected improvement would come from less drastic cutbacks in spending by businesses. And, there’s hope that companies will need to replenish razor-thin inventories of goods, prompting factories to up production, which would aid economic activity.

In the first quarter, the economy contracted at a 5.7 percent pace. That followed a staggering 6.3 percent annualized drop in the fourth quarter of 2008, the biggest in a quarter century.

Federal Reserve Chairman Ben Bernanke has said he is hopeful the recession will end later this year. And NABE forecasters predict the economy could start growing again as early as the third quarter. Obama’s stimulus package of increased government spending and tax cuts should help economic activity.

An inflation index tied to the consumer spending and income report showed that prices — excluding food and energy — rose 1.9 percent in April from a year ago. That was up slightly from a 1.8 percent annual increase in March.

6/1/2009 11:01 AM JEANNINE AVERSA AP Economics Writer WASHINGTON