consensus remains a continuing slowing us economy

Bloomberg

Personal Spending in U.S. Increases 0.6% in April (Update2)
May 26 (Bloomberg) -- Consumer spending in the U.S. rose 0.6 percent in April, mainly reflecting an increase in prices that suggests inflation is taking a toll on Americans' buying power.

The increase followed a revised 0.5 percent gain in March that was less than previously estimated, the Commerce Department reported in Washington. After adjusting for inflation, spending increased 0.1 percent for a second month. A measure of prices tracked by the Federal Reserve accelerated over the last year.

Consumer confidence is faltering as fuel bills and interest rates rise, which may hasten a spending slowdown in coming months, economists said. The report adds to evidence that Fed policy makers are faced with the prospect of slower growth and faster inflation as they prepare to meet at the end of June.

Spending is ``undergoing quite a slowdown,'' said Elisabeth Denison, an economist at Dresdner Kleinwort Wasserstein in New York. ``The Fed is looking at the slowdown in spending as an indication that inflation pressures will remain contained. They might feel like they can stay on hold in June.''

The report also showed incomes rose 0.5 percent for a second month. The gain reflected a 0.9 percent jump in wages and salaries, the largest since July 2005. Wages increased 0.5 percent in March and February.

Inflation Measure

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in April and was up 2.1 percent from the same month in 2005. The increase over the last year exceeded the top end of Fed Chairman Ben S. Bernanke's preferred zone for the first time since March 2005. Bernanke is among central bankers who have said they would be comfortable with 1 percent to 2 percent increases in these readings.

The government's 5 1/8 percent note maturing in May 2016 rose 1/16, pushing down the yield 1 basis point to 5.06 percent at 8:50 a.m. in New York.

``In light of the clear deterioration in the inflation outlook since early 2006, the Fed may have to alter its game plan,'' Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said before the report. ``The evidence that core inflation has moved above the Fed's comfort zone is too compelling and the indications of a slowdown in activity are too tentative to allow the central bank to pause next month.''

Savings Rate Falls

Because the increase in spending was larger than the gain in incomes, the savings rate fell to minus 1.6 percent from minus 1.4 percent in March. Last month's rate was the lowest since August. A negative rate suggests consumers are dipping into savings to maintain spending.

Economists forecast spending would rise 0.6 percent, matching the initially reported March increase, according to the median of 69 estimates in a Bloomberg News survey. Incomes were forecast to rise 0.7 percent.

Incomes rose 5.4 percent in April from the same month last year, paced by a 5.3 percent gain in wages and salaries. Disposable income, or the money left over after taxes, increased 0.4 percent for a second month and were up 4.7 percent in the last 12 months.

Taking into account changes in prices, disposable income fell 0.1 percent last month after no change in March.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 0.3 percent after rising 0.5 percent. Purchases of non-durable goods rose 0.2 percent after falling 0.3 percent. Spending on services, which account for almost 60 percent of all outlays, increased 0.1 percent after rising 0.3 percent.

May Spending

There is little evidence that spending has picked up this month. Retail sales were up 0.2 percent through May 20 compared with April, according to a report from the International Council of Shopping Centers earlier this week.

``Chain-store sales have been quite weak so far in May,'' Haseeb Ahmed, an economist at JPMorgan Chase Bank in New York, said in a note to clients. ``The data so far do point to weak May core retail sales.''

Consumer spending this quarter will probably grow at an annual rate of 2.5 percent, less than half the 5.2 percent pace in the first three months of the year, according to a forecast by economists at JPMorgan Chase. Spending rose at an average 3.8 percent pace per quarter in the last decade.

JPMorgan Chase last week dropped its forecast for second- quarter growth to 2.5 percent from a previous estimate of 3 percent as slower consumer spending restrains the economy.

First Quarter

The economy grew at an annual rate of 5.3 percent from January though March, slower than forecast and reflecting less momentum in consumer and corporate spending, the Commerce Department reported yesterday. Consumer spending for the quarter was revised down from a 5.5 percent rate initially reported.

``We continue to see higher gasoline and utility prices affecting our customers around the world and this could pressure our results as we move into the second quarter,'' H. Lee Scott, chief executive officer of Wal-Mart Stores Inc., the world's largest retailer, said in a May 16 conference call with investors.

Bentonville, Arkansas-based Wal-Mart reported last week that sales in the quarter ended April 30 rose the most in two years. Sales slowed at the end of April as gasoline prices rose, Chief Financial Officer Thomas Schoewe said in an interview.

The University of Michigan's preliminary index of May consumer sentiment fell to 79 from the final April reading of 87.4, the biggest drop since hurricanes battered the Gulf Coast last year, according to a report earlier this month. The university's final reading is due today at about 9:45 a.m.

Still, an improving job market and rising incomes are helping consumers better cope with the jump in gasoline prices and will prevent spending from collapsing, economists said.



To contact the reporter on this story:
Carlos Torres in Washington [email protected]

Last Updated: May 26, 2006 08:52 EDT