- The Washington Times - Tuesday, June 2, 2009

Americans’ income after taxes jumped in April, construction spending unexpectedly rose in the same month and manufacturing shrank less than expected in May as new orders increased for the first time since November 2007. But all of these seemingly favorable developments were tempered by caveats.

Rising unemployment payments and declining personal taxes in April, both of which were part of the $787 billion economic stimulus package, were instrumental in raising after-tax incomes, which increased 1.1 percent, the Commerce Department reported Monday.

However, worried about rising unemployment and the massive hit to their net worth from plummeting home values, households stuffed much of their increased income into their piggy banks in April and reduced their spending for the second month in a row, the Commerce Department reported. The once-plunging personal savings rate, which reached zero a year earlier, jumped to 5.7 percent in April, its highest level in 14 years.

“Although a higher savings rate is needed over time, the sharp increase over the past several months threatens to hinder the recovery, as saving will come at the expense of spending,” said Ryan Sweet, a senior economist at Moody’s Economy.com.

Consumer spending accounts for 70 percent of the economy. After plunging during the second half of last year, consumer spending increased at an annual rate of 1.5 percent last quarter, when the economy contracted by 5.7 percent. Mr. Sweet expects consumer spending to fall about 1 percent in the second quarter.

The Commerce Department’s report of an unexpected rise in construction spending also arrived with a caveat. “Excluding the volatile and badly estimated residential improvements category,” which increased 8.9 percent, construction “spending was down 0.3 percent,” said Patrick Newport, U.S. economist for IHS Global Insight.

After falling off a cliff during the last four months of 2008, the decline in manufacturing has moderated during the first five months of 2009, the Institute for Supply Management reported Monday.

“While employment and inventories continue to decline at a rapid rate and the manufacturing sector continued to contract during [May], there were signs of improvement,” said Norbert Ore, chairman of the ISM’s manufacturing survey committee. He pointed to rising orders, including exports, and mounting evidence that supply chains were “starting to free themselves of excess inventories.”

The recovery in manufacturing “will be gradual and choppy because of the troubles of the domestic auto industry,” said Mr. Sweet of Moody’s Economy.com. “Reduced output from the Big Three will ripple through the supply chain, imposing a hurdle for manufacturing to overcome before a self-sustaining recovery takes hold.”

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