By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items, further evidence that economic growth was gathering momentum in the second quarter.
While other data on Thursday showed a modest increase in first-time applications for unemployment benefits last week, the underlying trend in jobless claims continued to suggest the labour market was tightening.
"The robust rebound in spending provides some much needed confidence that the economic recovery is continuing to build on the positive momentum of recent months," said Millan Mulraine, deputy chief economist at TD Securities in New York.
The Commerce Department said consumer spending increased 0.9 percent last month, the biggest gain since August 2009, after an upwardly revised 0.1 percent rise in April.
May's sturdy increase suggested households were finally spending some of the windfall from lower gasoline prices, and capped a month of solid economic reports.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have been unchanged in April and economists had forecast a 0.7 percent rise in May.
The increase in spending was the latest sign that growth was accelerating after gross domestic product shrank at a 0.2 percent annual rate in the first quarter, as the economy battled bad weather, port disruptions, a strong dollar and spending cuts in the energy sector.
From employment to the housing market, the economic data for May has been bullish. Even manufacturing, which is struggling with the lingering effects of dollar strength and lower energy prices, is starting to stabilise.
The firming economy suggests the Federal Reserve could raise interest rates this year even as inflation remains well below the U.S. central bank's 2 percent target.
U.S. stock index futures rose slightly after the data, while prices of Treasuries fell. The dollar edged up against a basket of currencies.
LABOUR MARKET TIGHTENING
Last month, spending on long-lasting goods such as automobiles jumped 2.2 percent, while outlays on services like utilities rose 0.3 percent.
When adjusted for inflation, consumer spending increased 0.6 percent, the largest jump since last August, after being unchanged in April. Last month's solid rise in real consumer spending could see economists bump up their second-quarter GDP estimates.
Personal income increased 0.5 percent in May after a similar gain in the prior month. Income is being boosted by a tightening labour market, which is starting to push up wage growth.
A separate report from the Labor Department showed initial claims for state unemployment benefits rose 3,000 to a seasonally adjusted 271,000 for the week ended June 20.
But it was the 16th straight week that claims had held below 300,000, a threshold usually associated with a firming labour market. The four-week moving average of claims, considered a better measure of labour market trends as it irons out week-to-week volatility, fell 3,250 to 273,750 last week.
The labour market is tightening, with the unemployment rate not too far from the 5.0 percent to 5.2 percent range that most Fed officials consider consistent with full employment.
The strengthening jobs market could be bolstering confidence in the economy, encouraging households to tap into savings that have been boosted by lower gasoline prices.
The saving rate fell to 5.1 percent last month from 5.4 percent in April. Still, savings remain at lofty levels.
Despite the acceleration in consumer spending, inflation pressures remained tame. A price index for consumer spending increased 0.3 percent last month after being flat in April.
In the 12 months through May, the personal consumption expenditures (PCE) price index rose only 0.2 percent.
Excluding food and energy, prices edged up 0.1 percent after a similar gain in April. The so-called core PCE price index rose 1.2 percent in the 12 months through May, the smallest gain since February 2014.