U.S. consumer spending in May rose for the first time since February and savings hit a record high as federal stimulus measures boosted incomes, bolstering the view that the economy was close to emerging from recession.
U.S. consumer sentiment also edged higher this month to its strongest since February 2008.
Consumer spending, which accounts for more than 70 percent of U.S. economic activity, rose 0.3 percent in May, the Commerce Department said on Friday. The department also revised up April's figure to unchanged from a small decline previously.
Personal income jumped 1.4 percent last month, propped up by social benefit payments from the government's massive economic stimulus.
U.S. stocks fell as the jump in savings to the highest level since records began in 1959 boosted worries the economic recovery will not make much headway if consumers save rather than spend. The U.S. dollar extended losses versus the euro as the data reduced safe-haven demand for the greenback.
Though consumption is positive, it's kind of a tepid rebound versus the huge bounce-back everyone was expecting. So we have to see if this is stabilization, said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey.
The government programs are new. We really have no history on it, and the rules tend to be changing as well. Right now we're on new ground with a lot of this, at least in the short-term.
The stimulus provided for one-time payments of $250 to people receiving Social Security, supplemental security income, and other benefits.
Personal savings jumped to a record annual rate of $768.8 billion. The saving rate climbed to 6.9 percent, the highest since December 1993, the department said.
CONSUMER SENTIMENT RISES
A separate report showed U.S. consumer confidence improved in June to the highest since February 2008.
The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June stood at 70.8, up from 68.7 in May, equaling February 2008's reading. This was above economists' median expectation for a reading of 69.0, according to a Reuters poll.
The index of consumer expectations edged lower, however.
Over the past four months, sentiment has improved moderately, suggesting that consumers' attitudes about the economy are improving, said Steven Wood, chief economist at Insight Economics in a research note.
However, they remain very cautious. Nevertheless, these data do suggest consumers are no longer shell shocked.
Since the November 2008 low of 55.3, the sentiment index has gained 15.5 points, recouping about one-third of the loss posted since the peak in January 2007.
Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon as consumers begin to increase their spending on houses, vehicles, and large household durables, the Michigan report said in a statement.
It warned, however, this recovery won't be accompanied by strong bursts of spending, with consumers intent on rebuilding their reserve funds and significantly paying down their debt.
Reflecting persistent worries about the future, consumers' assessment of the 12-month economic outlook fell to 69 in June from 75 the previous month.
Meanwhile, their one-year inflation expectations rose to 3.1 percent in June, the highest since October 2008, from May's reading of 2.8 percent.
Major brokerages have raised their forecasts for U.S. gross domestic product.
Bruce Kasman, JP Morgan chief economist, increased his GDP forecast to 2.5 percent growth in the third quarter from a 1 percent rise. The revision reflects his expectations of a powerful turn in the industrial cycle in the next quarter.
Barclays Capital upgraded its GDP forecast. It now expects U.S. GDP in the third quarter to grow 2.5 percent, up from 2.0 percent, and in the fourth quarter to rise 3.5 percent, up from 3.0 percent.
Our U.S. revision was made on account of the 'cash for clunkers' legislation, which we estimate will cause auto output to jump 50 percent.
The bank added that the legislation will boost an economy already set to recover. Barclays said this week brought more evidence that the pace of contraction in the second half is likely to ease markedly.
Dallas Federal Reserve Bank President Richard Fisher also echoed the positive sentiment on the U.S. economy. In a speech in Dallas, Fisher said the economy is likely to return to growth in the second half of the year.
(Additional reporting by Mark Felsenthal; Editing by Diane Craft)