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Consumer spending up 0.2 per cent in May, helped by auto sales; income rose 0.4 per cent

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WASHINGTON - U.S. consumers boosted their spending only modestly in May, a disappointment to economists who said the weaker-than-expected gain will likely mean a lesser economic rebound in the April-June quarter than many had envisioned.

Spending rose just 0.2 per cent last month after no gain in April, the Commerce Department said Thursday. The two months followed a robust spending surge of 0.8 per cent in March.

Income rose a solid 0.4 per cent in May after a 0.3 per cent April gain.

Last month's 0.2 per cent gain in spending was just half the increase that analysts had been expecting. Some said that unless June brings a big increase, spending may not provide as much support to the economy in the second half of the year as they had been expecting.

Paul Dales, senior U.S. economist at Capital Economics, said consumer spending may end up rising at an annual rate of 1.7 per cent in the April-June quarter, which he said "wouldn't be much of a rebound" from the sluggish 1 per cent growth in consumer spending last quarter.

Consumer spending is closely watched because it accounts for about 70 per cent of economic activity.

Dales said strength in other areas should still lift economic growth to around a 3 per cent annual rate in the current quarter after a dismal 2.9 per cent annual decline in economic output in the first three months of the year.

Jennifer Lee, senior economist at BMO Capital Markets, agreed that the spending figure was pointing to economic growth of around 3 per cent in the second quarter, instead of the 3.8 per cent she had earlier forecast.

An inflation gauge that's closely monitored by the Federal Reserve has risen 1.8 per cent over the past 12 months through May, the fastest rise since late 2012 but still below the Fed's 2 per cent target.

In May, spending on durable goods jumped 0.7 per cent, a rebound after having fallen 0.9 per cent in April. In May, auto dealers reported their best sales month in nine years, helped by brisk demand for SUVs and pickup trucks.

Sales of nondurable goods rose 0.2 per cent in May after a stronger 0.4 per cent April gain, while spending on services such as rent and utilities increased a modest 0.1 per cent.

The inflation gauge the Fed watches edged up 0.2 per cent in May. The 1.8 per cent increase over the past 12 months was up from a 12-month increase of 1.6 per cent in April and increases of 1 per cent or less for much of the past year.

But the Fed at its meeting last week expressed no concerns about the slight uptick in inflation. It was a signal to financial markets that the Fed is comfortable keeping interest rates at record low levels for now to give the economy a boost. Many analysts believe the Fed's first rate hike will not occur until the summer of 2015.

The government reported Wednesday that overall economic growth, as measured by the gross domestic product, shrank at an annual rate of 2.9 per cent in the January-March quarter. That's the biggest drop since the depths of the recession five years ago.

But analysts said the big dip reflected temporary facts such as harsh winter weather that cut into consumer and business activity. In addition, businesses cut back on restocking and companies reduced their spending on new equipment and the trade deficit significantly worsened.

Analysts see all those trends reversing in the current quarter and they expect growth to rebound but with May's disappointing spending increase, they said the rebound may be closer to 3 per cent growth rather than the 3.5 per cent to 4 per cent they had been forecasting.

Analysts expect that the economy will keep expanding in the second half of the year with growth around 3 per cent as consumer spending is aided by strong gains in employment, rising consumer confidence and gains in the stock market and home prices which will make people feel wealthier and thus more willing to spend.

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