Consumers banked a big portion of their tax rebate checks last month, giving them enough cushion to keep spending for a few more months and perhaps postponing a recession that once seemed inevitable.

The personal saving rate -- which was in negative territory as recently as November as households went into debt to maintain spending -- jumped to 5 percent in May, the highest since March 1995, according to Commerce Department data released on Friday.

Some $48 billion in rebate checks arrived in May, but households increased their spending by just $7 billion, or about 14 percent of the extra money they received.

With another roughly $50 billion of the nearly $110 billion total in stimulus checks arriving in June, the next month's report is likely to show the saving rate jumped again, perhaps to 8 or 9 percent, said UniCredit economist Harm Bandholz.

The money probably won't stay in the bank for long as debt-laden households struggle to pay for pricier food and fuel. That points to higher spending in the coming months, although inflation will limit the economic benefit because consumers must spend more than they did a year ago to buy the same amount of goods and services.

Even so, JPMorgan economists think the economy could grow at a 2 percent pace in the second quarter, with more modest growth in the third. Just a few months ago, the conventional wisdom on Wall Street was that the economy would be contracting by now.

What happens when the money runs out is the big question, and the answer could come as early as October. Rebate checks cannot cure the stubbornly high inflation that is sapping consumer spending power, nor can they fix the slumping housing market, which has wiped out a big chunk of household wealth.

The worry is that after the stimulus relief fades away, the consumer will still be faced with the same underlying problems, said Nigel Gault, chief U.S. economist with Global Insight in Lexington, Massachusetts. We expect to see both real consumer spending and real GDP declining in the fourth quarter.


Until the 1990s, it was rare for the saving rate to dip below 7 percent. But as household wealth soared, thanks in large part to the housing and stock markets, Americans saw little need to save much money the old-fashioned way.

Since January 2005, the saving rate has hit 1 percent or better in only six of 41 months -- including May's jump -- and it was in negative territory in four months.

Economists had thought the housing bust and falling stock market would encourage consumers to sock away more. The net wealth of U.S. households dropped for two consecutive quarters through March, the first back-to-back declines since 2002, according to Federal Reserve data.

UniCredit's Bandholz said he was surprised that the saving rate remained well below 1 percent through the first four months of 2008. Given the negative wealth effect, we think it should be around 1.5 percent, he said.

For the U.S. economy, it is a delicate balance between spending enough to keep businesses chugging, and saving sufficiently to keep debt levels from becoming burdensome.

Friday's figures show the rebate checks are helping to even the scales, but the well is about to run dry. The Treasury Department had sent out stimulus checks to 94.95 million households as of Friday, for a total of $79.304 billion. That leaves about a quarter, or just under $30 billion, still to come.

Stripping out the impact of those checks, the personal income data looked a lot less rosy in May. Wages and salaries increased at a tepid 0.3 percent pace last month, and the momentum is slowing.

The deceleration in wages and salaries is worrisome because this is what drives spending over the long run, said Mark Vitner, senior economist with Wachovia. Once the rebate checks are spent, spending will fall back in line with income, which is running at its slowest pace since the aftermath of the last recession.