The Commerce Department said Thursday that consumer spending rose 0.9 per cent last month, up from a revised 0.1 per cent increase in April. May spending registered the biggest gain since August 2009, when the government's "Cash for Clunkers" program fueled auto-buying.
The increased spending last month suggests that the positive impacts from solid hiring and cheaper gasoline are starting to ripple through the economy.
"We are finally seeing signs of consumers beginning to spend the gasoline savings they have been sitting on since the start of this year," said Paul Ashworth, chief U.S. economist at Capital Economics.
Personal income also increased a healthy 0.5 per cent. The savings rate for after-tax income fell slightly to 5.1 per cent from 5.4 per cent.
Until recently, lower gas prices and an improved job market were not enough to unlock greater consumer spending. Instead, Americans ramped up their savings. This helped put their personal finances on a more sustainable path, but it limited the ability of the overall economy — which relies mostly on consumer activity — to grow at a faster pace and potentially boost their incomes.
The consumer spending report confirms signs elsewhere that people are loosening the grip on their wallets.
Retail sales climbed 1.2 per cent between May and April, led by auto dealers, clothiers and building materials stores, the Commerce Department reported earlier this month.
Spending at retailers is up 2.7 per cent over the past 12 months. This includes annual gains of 8.2 per cent in both the auto and restaurant categories.
All of that could lead to more hiring, a tighter supply of job applicants and larger pay hikes, economists say.
The greater spending on building materials also corresponds with a surge in home-buying.
Sales of existing homes in May jumped 5.1 per cent to an annual pace of 5.35 million, the National Association of Realtors said Monday. The real estate market is on pace for its strongest year since 2007, the last full year before the recession.
Purchases of new homes have also jumped, registering a 24 per cent increase year-to-date, according to the government.
Many economists believe it was the severe winter weather that froze consumer spending earlier this year, before a bounce back this spring. The overall economy shrank in the first three months of the year at an annual rate of 0.2 per cent. But some analysts say revitalized consumer spending should lift growth back to a respectable annual rate of 2.5 per cent or better in the April-June quarter.
Consumer spending may be aided by two major factors.
Americans are saving money at the pump. Gasoline costs have stabilized in recent weeks. At a national average of $2.78 a gallon, they remain about 90 cents below their average a year ago, according to the AAA's Daily Fuel Gauge Report.
Also, the economy has added 3.1 million jobs over the past year and the unemployment rate has fallen to 5.5 per cent from 6.3 per cent. The influx of paychecks generally leads to additional spending by the newly employed.