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Report: May savings outpace spending

6/26/2009

Washington, D.C. The Commerce Department said Friday that consumer spending rose 0.3% in May, in line with expectations.

But the department said incomes jumped 1.4%, the biggest gain in a year and easily outpacing the expected 0.3% increase.

While according to economists the higher savings rate is healthy in the long term, without the accompanying consumer spending, the government may have to do more to revive the economy, possibly through further tax breaks and spending.

The savings rate, near zero in early 2008, surged to 6.9%, the highest since December 1993.

The income increase reflected temporary factors relating to the $787 billion economic stimulus program that President Barack Obama pushed through Congress in February to fight the recession. That program included one-time payments to people receiving Social Security and other government pension benefits.

The stimulus package also featured reductions in payroll tax withholding designed to get people to start spending more money and boost the economy.

According to a report by the Associated Press, private economists viewed the 0.3% rise in spending in May as encouraging after no change in April and a 0.3% drop in March.

Economists believe that the 0.3% rise in spending in May will help bolster the economy in the second quarter and will translate into a smaller drop in GDP of around 2% during this period, according to the AP.

Economists also believe that GDP will begin growing again in the second half of this year, signaling an end to the recession that began in December 2007.

However, the rebound is expected to be subdued, said AP, because unemployment, already at a 25-year high of 9.4%, is expected to continue rising, pushing worried households to save even more against the threat of further layoffs.

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