Investment News: Money Morning

By Jason Simpkins
Associate Editor

Consumer spending in the United States rose an unexpected 0.8% in the month of May, the biggest increase since last November, as nearly $50 billion worth of rebate checks were cashed and put to use.

Incomes grew 1.9% in May – their biggest jump in nearly three years – and the Commerce Department said rebates fueled a 1% surge in retail sales for the month.

However, analysts have been quick to dismiss the figures as an apparition that will dissipate along with government assistance. 

“This is the tax rebate that you’re seeing here,” Chris Low, chief economist at FTN Financial, told Bloomberg. “It’s a sense of hope, but it doesn’t last. Call it a holiday from reality.”

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Skeptics point to factors such as the climbing unemployment rate and declining consumer sentiment. Unemployment hit 5.5% in May – a 0.5% increase from April and the largest monthly increase in 23 years. Meanwhile, the Conference Board said its overall monthly index tumbled to 50.4 this month, its lowest point since hitting 47.3 in February 1992. The index measured a revised 58.1 in May.

Still, the government stimulus checks have done the job so far, and could lead to a surge in gross domestic product (GDP) in the second quarter. FTN’s Low forecast a 2% boost to second-quarter GDP, while economists at Morgan Stanley (MS) predict a tamer 1.6% rise in GDP for the second quarter. First-quarter GDP was revised upwards to 1% last week.

There was also good news on the inflation front, as the central bankers’ preferred price gauge, which excludes food and energy, increased a mild 0.1%. The gauge was up 2.1% from last year.

News and Related Story Links:

• Bloomberg:
  U.S. Economy: Spending Rose More Than Anticipated

• Money Morning:
  Fed Holds Rates Steady in Face of Upside Inflation Risk

June 30th, 2008

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