U.S. Economy: Spending Cools, Risking Further Economic Slowdown

Discussion in 'Wall St. News' started by S2007S, Apr 30, 2007.

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    U.S. Economy: Spending Cools, Risking Further Economic Slowdown

    By Joe Richter

    April 30 (Bloomberg) -- Consumer spending in the U.S. rose less than forecast in March, raising doubts about the staying power of what Federal Reserve Chairman Ben S. Bernanke called the mainstay of economic growth.

    Purchases gained 0.3 percent from the prior month, less than half the 0.7 percent increase in incomes, the Commerce Department said today in Washington. The Fed's preferred measure of inflation was unchanged from a month earlier.

    Bonds rallied as traders bet that slacker spending will further weaken an expansion that was the slowest last quarter in four years. Some investors speculated that the benign monthly inflation figures give Bernanke scope to respond to the slowdown by cutting interest rates by September.

    There is ``a bit more caution on the part of consumers,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``We're coming off two very strong quarters of consumer spending, so you have to anticipate some slowdown.''

    Economists had forecast a 0.5 percent rise in spending, which accounts for two-thirds of the economy, according to the median of estimates in a Bloomberg News survey. Purchases the prior month were revised higher to a 0.7 percent gain, compared with a previously reported 0.6 percent increase.

    The yield on the benchmark 10-year Treasury note fell to 4.65 percent at 9:15 a.m. in New York from 4.69 percent on April 27. The dollar pared its advance against the euro.

    Wage Gains

    One factor helping to sustain spending is wages. Income growth exceeded the 0.6 percent predicted by economists.

    Fed policy makers are counting on consumers to keep the expansion going while housing stumbles and manufacturing cools.

    ``Slow'' growth in manufacturing in most regions of the U.S. was balanced by ``generally positive'' retail sales since the end of February, according to the Fed's regional survey, known as the Beige Book. ``Most districts reported tight labor market conditions,'' the Fed said in the report last week.

    The unemployment rate matched a five-year low in March and wages and salaries increased 1.1 percent in the first quarter, the most in six years, according to reports from the Labor Department.

    Today's figures may help ease worries that higher wages could stoke broader inflation.

    Inflation Gauge

    The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, was unchanged in March, the first month since November without an increase. It followed a 0.3 percent February increase. The gauge rose 2.1 percent in the 12 months ended in March.

    Fed policy makers have said they'd be comfortable with inflation in a 1 percent to 2 percent range. The central bank on March 21 kept the benchmark overnight lending rate at 5.25 percent for a sixth straight meeting.

    The savings rate improved to minus 0.8 percent from minus 1.2 percent a month earlier. A negative rate suggests consumers are tapping savings to maintain spending.

    Disposable income, or the money left over after taxes, rose 0.7 percent after increasing 0.6 percent the previous month.

    Higher gasoline prices and stagnant home values will keep consumer spending from growing as much this quarter as it did in the first three months of the year, economists said.

    Home Prices

    Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 0.1 percent in March. Purchases of non-durable goods fell 0.1 percent. Spending on services, which account for almost 60 percent of all outlays, dropped 0.3 percent, the biggest decline since January 2006.

    The drop in spending on services may reflect lower utility bills during an unseasonably warm March, economists said.

    A report last week showed home prices in 20 cities dropped in the year ended in February. Economists said such declines may discourage homeowners from borrowing against the value of their houses, removing a source of cash for consumers.

    Prices at the gasoline pump for regular-grade gasoline rose in April to $2.88 a gallon, the highest in eight months, according to the Energy Department.

    Wal-Mart, the world's largest retailer, said April 12 that this month's sales may be unchanged or decline as much as 2 percent. The Bentonville, Arkansas-based company said it may have trouble meeting its first-quarter earnings forecast because of a ``tough sales environment.''

    To contact the reporter on this story: Joe Richter in Washington at jrichter1@bloomberg.net