Stimulus Checks Boost Income in May, Savings Rate a 16 Year High

by devteam June 26th, 2009 | Share


Personal income levels advanced far more than forecasts in May, helping consumption see its first gain in three months, the Bureau of Economic Analysis reported. The rise in income is directly related to social security checks sent out in the month, so the gain is temporary and doesn’t reflect fundamental improvement in the economy.

“Personal tax cuts and government income support have brought consumers back from the dead, but the recuperation period promises to be a lengthy one,” said Sal Guatieri from BMO Capital Markets.

The report showing income rise by 1.4% in the month, a full percentage point better than expectations. The extra income helped spending advance 0.3%, in line with expectations, but that should be considered a disappointingly soft advance considering the boost in income.

“Approximately 50 million Americans received stimulus checks for $250 in May, which represents about 80% of the increase seen in personal income in May,” noted TD strategist Ian Pollick. 

In other words, the gain in spending indicates little more than that social security checks were deposited into gas tanks to contend with rising prices for oil.

“Given the jump in incomes, it’s surprising that sales remained soft in May, a testament to continued brisk headwinds facing consumers,” Guatieri added.

Stimulus checks aside, averages wages and salaries actually declined 0.1% in the month, pushing the annual decrease to -1.1%. 

“We interpret this as evidence that rising unemployment is significantly impacting household income creation,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

Meanwhile, the savings rate climbed from 5.6% to 6.9%, arn16-year high. To some extent that’s good news as it indicates anrnincreasing sense of responsibility among the public; on the other hand,rnsavings aren’t helping the consumption-based economy to recover.

The report showed inflation remains benign. All-items inflation inched up 0.1% for the second straight month, while an equivalent advance in core prices marked a slower gain than the 0.3% increase in April.

Market reaction to the report was close to nil. Fifteen minutes before the opening bell, the Dow remains down 2 points and the S&P 500 remains around 915, compared with Thursday’s close at 920. 


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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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