Spending Likely Rose on Tax Rebates, Economists Say

Consumer spending in America probably rose in May by the most in six months as the government's tax rebates gave households the means to overcome soaring fuel bills, economists said before reports this week.

Spending increased 0.7%, the most since November, according to the median estimate of economists surveyed by Bloomberg News. Other figures may show home sales were the third-lowest on record and property values kept dropping, signaling no end to the real-estate recession.

Americans didn't hoard the rebate money last month or use it just to pay for gasoline, indicating rising unemployment and declining home equity have yet to spark a need to save. Federal Reserve policy makers, meeting this week, are projected to keep interest rates unchanged as concern over inflation mounts and anxiety over the immediate prospects for growth wanes.

"Spending has increased because of the rebate checks, and there's more to come," the president of ClearView Economics LLC in Pepper Pike, Ohio, Ken Mayland, said. "Fed officials have stepped up the rhetoric on inflation."

Consumers used some of the almost $50 billion in rebates received through May to fill up their autos' gasoline tanks and purchase groceries, clothing, and electronics. Retail sales jumped 1% last month, twice as much as forecast, government figures showed.

The Commerce Department's June 27 report on spending will also include figures on purchases of services, such as utilities and medical care, not tracked by retail sales. It may also show personal income rose 0.4% in May following a 0.2% gain the prior month, according to the Bloomberg survey.

The bulk of the tax rebates will probably be spent from July through September, giving third-quarter growth a lift, before the economy decelerates again in the last three months of the year, according to the median estimate of economists polled by Bloomberg earlier this month.

"After the rebate impact fades, we expect weak consumer fundamentals to cause spending to soften significantly," the chief U.S. economist at Deutsche Bank Securities in New York, Joseph LaVorgna, said.

The largest U.S. electronics retailer, Best Buy Co., last week said first-quarter profit fell 6.8% as consumers bought less profitable video games and laptop computers. Purchases of flat-panel televisions also contributed to a 13% increase in sales, the Richfield, Minnesota-based retailer also said.

"It is very early in what we still expect to be a volatile year for the consumer," the chief financial officer, Jim Muehlbauer, said on a June 17 conference call with analysts and investors.

The spending increase will reinforce Fed chairman Ben Bernanke's assessment this month that "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." He also pledged to "strongly resist" any surge in consumers' inflation expectations.