The Commerce Department said Thursday that consumer spending rose 0.3 per cent last month, nearly erasing a similar decline in April. Income rose 0.5 per cent.
At the same time, economists said the downward revisions to spending for three of the first four months of the year signal weaker growth in the April-June quarter, which ends this week.
Paul Dales, senior U.S. economist at Capital Economics, said he thinks growth has slowed in the second quarter at an annual rate of just 1.5 per cent. That's down from his previous forecast of a 2 per cent rate. Economists at Barclays have cut their forecast from an annual rate of 1.8 per cent to a sluggish rate of 1.4 per cent.
Tepid growth could keep the Federal Reserve from scaling back its bond purchases later this year. Chairman Ben Bernanke spooked investors last week when he said the Fed will likely slow its bond-buying this year if the economy continues to strengthen. But Bernanke added that if the economy weakens, the Fed won't hesitate to delay its pullback or even step up its bond purchases again.
The bond purchases have helped keep interest rates low.
Dales also noted that the inflation gauge the Fed watches most closely has dropped to a record low of 1.1 per cent, well below the Fed's 2 per cent target. When inflation falls too low, the Fed normally keeps rates low to try to boost prices.
Economists are hopeful that growth will pick up in the second half of the year, and some recent data have been encouraging. Consumers, benefiting from low inflation, spent more at retail businesses in May, notably for cars, home improvements and sporting goods.
U.S. factories are fielding more orders. Higher home sales and prices are signalling a steady housing recovery. And employers added 175,000 jobs last month, in line with the average job growth over the past 12 months.
Steady job growth has lowered the unemployment rate to 7.6 per cent, down from 10 per cent in 2009. And this week the Conference Board said a better job market helped lift Americans' confidence in the economy rose to the highest level in 5 1/2 years.
Still, on Wednesday the government downgraded its estimate for growth in the January-March quarter to a 1.8 per cent annual rate, sharply below its previous estimate of a 2.4 per cent rate. The main reason for the revision was consumer spent less than initially estimated. Some economists said the revision suggested that an increase in Social Security taxes this year was squeezing consumers more than expected.
The tax increase has lowered take-home pay for most Americans. A person earning $50,000 a year has about $1,000 less to spend this year. A high-earning couple has up to $4,500 less to spend.Suggest a correction