WASHINGTON (MarketWatch) — The U.S. personal savings rate jumped to a 14-year high of 5.7% in April as after-tax incomes were boosted by provisions of the economic-stimulus plan, the Commerce Department reported Monday.

This recent headline is the best indication yet that the consumer, and so the U.S. economy, is fast returning to health. Consumers account for almost 70 percent of economic activity in our economy, and the government’s stimulus spending is having the intended effect of building a foundation for future prosperity.

This is even though the stimulus is supposed to increase consumer spending to give the economy additional support. Instead, the huge 1.1 percent rise in disposable incomes in April mostly went into savings. This is better in the long run, as it adds reserves to the banking system—estimated at more than $2.5 trillion to date—which can be used to both pay down debt and create larger capital reserves for future investments.

The economy is beginning to heal itself, in a word, from its spendthrift ways. A major reason for the record banking profits of Bank of American and Wells Fargo in the first quarter is the $100 billion per month inflow of deposits to the banking system. The second quarter looks even better if consumers continue their thrifty ways.

Real consumer spending fell 0.1 percent, the second consecutive decline and the 8th decline in the past 11 months. Inflation-adjusted spending in April was lower than it was in December 2006. This will not create many jobs, but such thriftiness is also holding down the inflation rate, which hasn’t increased at all over the past 12 months.

The tax cut in the stimulus plan added $49.8 billion on an annual rate to disposable incomes in April. Another provision added $25 a week to unemployment compensation, pumping $11.8 billion annually into incomes.

So we are beginning to see the outline of this recovery. Most economists are predicting an actual end to the recession sometime this summer. Another major indicator of financial health is that U.S. corporate profits rose in the first quarter for the first time in almost two years. This is in part why stocks have been rallying of late.

A caveat, though, is that most of the profits came from a recovering financial sector. But that has to happen before the nonfinancial sectors can recover, which depend heavily on the credit markets. In fact, the manufacturing sector has been slowly improving since its December.  May new orders grew for the first time since November 2007, according to the Purchasing Managers’ ISM Index—another sign of recovery.

There is no question that the stimulus spending is having an effect on consumers’ confidence, as well. The Conference Board’s May Confidence Survey has returned to last September levels. “Looking ahead, consumers are considerably less pessimistic than they were earlier this year”, said Lynn Franco, Director of Consumer Research, “and expectations are that business conditions, the labor market and incomes will improve in the coming months.”

So as Dr Robert Shiller of Irrational Exuberance fame, and modern Keynesian economic theory posits, a restoration of confidence in U.S. financial institutions will determine whether both U.S. consumers and foreign investors continue to see the U.S. as the world’s economic powerhouse, as well as being a safe haven in troubled times.

Harlan Green © 2009