Consumers less gloomy, but they're still inclined to save

Household incomes went up in May, buoyed by the stimulus, but consumer spending still lags.

By , Staff writer

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    Chenille English-Boswell, an executive team leader at a Chicago area Target Store, checks price continuity in Chicago, May 20, 2009. The discount retailer reported a 13 percent decline in first-quarter profit on Wednesday as it confronts sluggish consumer spending.
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American consumers are feeling better – but not a whole lot better off – as a giant stimulus program begins to take effect.

Economic reports Friday showed a rise in consumer sentiment and a stimulus-fueled gain in household incomes. The numbers don't signal a quick rebound from recession, but they do suggest that President Obama's $787 billion stimulus plan is having an impact on Main Street.

Personal income rose in May despite rising unemployment and a decline in employer wages since last fall, according to a Commerce Department report. The stimulus is a key reason, helping to increase disposable incomes by lowering taxes and providing more payments through programs such as unemployment insurance.

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If the stimulus is providing a cushion, Americans are still on edge financially. They feel the pressure to save, more than an urge to spend.

“Consumers have become convinced that the steepest economic declines are now over, but very few consumers anticipate a quick end to the recession,” economist Richard Curtin said in a statement releasing the Reuters/University of Michigan Surveys of Consumers.

The survey's gauge of consumer sentiment edged up to a level of 70.8. That's well above where the index stood a year ago, at 56.4, but still reflects considerable financial stress. The index stood at 97 in January 2007, before the recession began.

Meanwhile, the Commerce Department said personal incomes rose 1.6 percent in May, while personal spending rose 0.3 percent. Instead of spending their new income, households pushed the savings rate up to 7 percent of disposable income.

The last time Americans were saving that much was in the early 1990s. Economists view a rise in the savings rate as a healthy sign. It means families are working to reduce high debt levels, rebuild retirement accounts, and be better prepared for financial emergencies. And if the trend is sustained, it will make the private sector less dependent on foreign lenders to finance job-creating investment.

In the near term, the effort to save more and pare down debt makes it hard for consumers to drive the economy into growth mode. The positive message from Friday's numbers is that consumer spending may be ready to start rising at least modestly. Such spending – which fell sharply during the worst months of the recession – accounts for most economic growth.

For now, most households remain affected by declining home values, shrinking retirement portfolios, or both. In the consumer confidence survey, two-thirds of families said they don't expect their finances to improve in the year ahead.

Against this difficult backdrop, many economists say the stimulus is working as hoped. But the American Recovery and Reinvestment Act still costs big bucks. In a CBS/New York Times poll taken earlier this month, a majority of Americans said they'd rather reduce the federal budget deficit than have the government borrow funds for stimulus efforts.

Mr. Obama has acknowledged the need to begin taming those deficits soon. Facing skepticism as he pushes for major healthcare reform and a “cap and trade” plan to reduce carbon emissions, the president said Tuesday that the measures “will not add to our deficits over the next decade.”

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