Income, Spending, and Saving Grow in May

In one of the few good economic signs coming out of the month of May, personal income, spending, and savings all grew, according to the Bureau of Economic Analysis. This provides great news: income grew more than consumer expenditures. Consequently, spending grew in a fiscally responsible way, since people had more income to spend, rather than rely more on credit. This increased savings. Yet, the spending growth was still relatively low, and probably not enough to provide much economic stimulus.

Here's a chart that tells most of the story:

income spending 2010-05.PNG

Let's start with personal income -- the green line. You can see that it has remained fairly stable over the past three months, growing between 0.4% and 0.5%. That's pretty good. Over that same period, disposable income (purple line) has averaged 0.5% growth. That's even better. For people to be able to spend more on discretionary purchases, their disposable income must increase.

Spending (the red line) has been less stable, however. In February and March we finally saw the growth increasing, after a downward trend. But it increased without as much additional income, which meant Americans were relying more on credit to spend and saving less. In April, however, that changed. Spending was constant, while income continued to grow. In May, we're seeing an even better outcome: more income growth, but with some additional spending as well.

Within spending, expenditures on services rose a sizable 0.5%. This indicates that the sort of spending ramping up might be more discretionary. Generally, this means more confident consumers, as they are more comfortable spending on non-necessitates.

Since income outpaced spending, savings also increased in May. Americans saved an annualized 6.3% more than in April. While this indicates that spending and saving are more fiscally responsible than what we saw in February and March, some economists may lament that Americans aren't spending more and saving less to better stimulate the weak economy. The ratio of saving to disposable income in May was 4% -- the highest we've seen since September 2009.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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