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

Another fresh round of economic data was released yesterday (Tuesday) with the prognosis looking dire for the U.S. economy.

Home prices as measured by the S&P/Case Shiller composite index of 20 metro areas fell 1.4% in April from March and slumped by a record 15.3% over the year. The group’s composite index of 10 metro areas dropped 1.6% in April, making for a record 16.3% annual drop.

According to the S&P, 13 of the top 20 metro areas are still posting record annual declines with price losses in the double digits for half of the areas.

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"The potential is a vicious cycle which we may already be experiencing. Falling home prices are leading to more foreclosures, which cause a further decline in prices," Richard DeKaser, chief economist at National City Corp. (NCC) in Cleveland, told Reuters.

The only bright spot to be found in the data was that the 20-city month-over-month decline was the smallest drop since the August-September 2007 period.

"If there is anywhere to look for possible improvement, it would be that the pace of monthly declines has slowed down for most of the markets," David Blitzer, chairman of the Index Committee at Standard & Poor’s, said in a statement.

Meanwhile a separate report from the Conference Board indicated consumer confidence had hit its lowest level in 16 years.

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.

Most analysts agree that consumer spending has held up relatively well in recent months, but that is easily attributable to the $50 million in economic stimulus payments the U.S. government sent out in May. Also, annual tax refunds have been coming in after the April tax season.

"Getting both [checks] at this time of year has led to an increase in household spending, but I expect this to be temporary. I’m looking for spending to trail off in the latter part of the summer," Bernard Baumohl, an economist at the Economic Outlook Group, told CNNMoney. "If consumers are not spending, then the economy is in serious trouble. I think we’re in a recession right now."

News and Related Story Links:

• CNNMoney:
  Consumer confidence tumbles to 16-year low

• Reuters:
   Home prices extend record slide in April: S&P