A tepid gain in consumer spending last month could fuel a debate over whether the United States and other governments should further stimulate their economies to sustain the recovery.
A report that Americans spent cautiously in May came after world leaders meeting in Toronto over the weekend pledged to reduce government deficits by cutting spending and raising taxes. They did so despite warnings from President Barack Obama that scaling back spending too fast could derail the global recovery.
U.S. lawmakers are wary of approving more stimulus spending in light of record-high budget deficits. As a result, millions of Americans could lose unemployment benefits and states could be forced to lay off tens of thousands of workers.
"In our view, it is way too early to apply the fiscal brakes," said Zach Pandl, an economist at Nomura Securities. Cutting off unemployment benefits "is a dangerous way to cut deficits when the economy is still fragile."
Economic growth, which leads to higher tax receipts and less spending on social programs, is the best way to reduce the deficit, Pandl said.
Other economists note that wages and salaries rose 0.5 percent in May, a second consecutive month of strong gains. That is a sign that the recovery can survive without government propping it up.
If the trend in income growth continues, "consumers' spending power will be bolstered, which will in turn drive economic growth, necessitating less government support," said Dan Greenhaus, chief economic strategist at Miller Tabak.
One thing is certain: Americans are being careful with their money. Consumer spending rose 0.2 percent last month after no change in April, the Commerce Department said Monday.
Consumer spending accounts for about 70 percent of economic activity. But the consumer hasn't been driving this recovery. Instead, it has depended more on business and government spending, along with exports. In the four quarters following the steep 1981-82 downturn, consumer spending rose by an average of 6.5 percent per quarter. By contrast, even as the economy has grown for the past three quarters, consumer spending rose an average of only 2.5 percent per quarter.
If consumption remains sluggish, the economy may not grow fast enough to generate jobs and quickly bring down the 9.7 percent unemployment rate. Some economists are concerned the economy could slow later this year if government cuts back on stimulus spending.
Pandl said Nomura is lowering its forecast for third-quarter economic growth to 2.2 percent from 2.6 percent based on the assumption that Congress will not extend federal unemployment benefits.
Up until last month, jobless workers who exhausted their 26 weeks of state benefits had been able to qualify for up 73 weeks of additional federal benefits. But Senate Republicans have blocked an extension, citing concerns over the deficit as their main reason. That means about 2 million out-of-work Americans could lose their benefits by the middle of July, the Labor Department estimates.
The Senate has also balked at providing stimulus money to cash-strapped state governments. Thirty states had been counting on federal support to help balance their budgets. Without the money, governors warn they'll have to lay off tens of thousands of workers.
The debate over how big a role governments should play featured prominently at the G-20 summit. World leaders agreed to cut deficits in richer countries in half by 2013, although they gave themselves some wiggle room to meet that goal.
Obama, who has been pushing for an extension of unemployment benefits in the U.S., said countries had to proceed at their own pace in either emphasizing growth or cutting deficits.
"We can't all rush to the exits at the same time," Obama said.
Income is rising as employers slowly add jobs. That could make up for lost unemployment insurance and other benefits.
Personal incomes rose for the sixth time in seven months, boosting household finances. The savings rate, or the percentage of income that wasn't spent, bumped up to 4 percent. Paychecks gained from recent increases in the average work week, as well as temporary census hiring.
"This supports our view that a rebound in labor income growth will support consumer spending" even as government payments fade, said Peter Newland, an economist at Barclays Capital.
Americans spent more on services in May, likely the result of greater use of electricity as the weather warmed up. Money spent on goods actually declined.
Many economists expect consumer spending to grow by about 3 percent in the current quarter, the same as the first quarter. The government said Friday that the nation's gross domestic product, the broadest measure of economic output, rose 2.7 percent in the January-to-March period, slower than previously estimated.
Employers added 431,000 jobs in May, but the vast majority were temporary census positions. Private employers added only 41,000 jobs. About 250,000 of census jobs are expected to end this month.
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