June 26, 2020 / 1:18 PM / 12 days ago

UPDATE 1-U.S. consumer spending rebounds; income plunges

(Adds details from report)

By Lucia Mutikani

WASHINGTON, June 26 (Reuters) - U.S. consumer spending rebounded by the most on record in May, but the gains are not likely to be sustainable, with income dropping and expected to decline further as millions lose their unemployment checks starting next month.

The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 8.2% last month. That was largest increase since the government started tracking the series in 1959. Consumer spending tumbled by a historic 12.6% in April.

Economists polled by Reuters had forecast consumer spending rising 9.0% in May. The surge in spending last month reflected the reopening of many businesses after being shut in mid-March to control the spread of COVID-19.

Consumers stepped up purchases of motor vehicles and recreational goods. They also boosted spending on healthcare, and at restaurants, hotels and motels.

But personal income dropped 4.2%, the most since January 2013, after surging by a record 10.8% in April when the government handed out one-time $1,200 checks to millions of people and boosted unemployment benefits to cushion against the COVID-19 hardship.

The payments are part of a historic fiscal package worth nearly $3 trillion. The drop in income last month reflected a decrease in government welfare payments related to the pandemic.

The government will stop paying an additional $600 per week in unemployment benefits on July 31.

Consumer spending in May was funded from savings, pushing the saving rate down to a still-high 23.2% from a record 32.2% in April.

Inflation remained weak last month, with the personal consumption expenditures (PCE) price index excluding the volatile food and energy components edging up 0.1% after falling 0.4% in April. In the 12 months through May, the so-called core PCE price index rose 1.0%, matching April’s gain.

The core PCE index is the Federal Reserve’s preferred inflation measure. The U.S. central bank has a 2% inflation target.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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