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Consumers More Sanguine, Spending Less

By Wayne Cole

NEW YORK (Reuters) - American consumers were a little less gloomy this month than first thought, a survey showed on Friday, but not by enough to eclipse worries of a spending slowdown once the boost from tax refunds fades.

A separate report on spending in February showed consumption growth had already slowed, even though incomes were holding up quite well.

Since consumer spending accounts for about two-thirds of U.S. economic activity, the slackening could mean those analysts looking for Gross Domestic Product to hit a 5.0 percent growth rate this quarter will have to trim back their forecasts.

"It suggests that growth of GDP (news - web sites) in the first quarter will be a bit slower than many anticipated, if these figures hold up. They may be revised again, but on the face of it, it appears that consumption spending cooled off a bit after a very strong fourth quarter," said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein in New York.

The University of Michigan's final reading of consumer confidence edged up to 95.8 in March from 94.4 in February, said market sources who saw the subscriber-only report.

A preliminary mid-month reading had put the index at 94.1, while economists had been looking for a dip in the final sentiment measure to 93.7.

The uptick was surprising enough to pull bond prices lower in otherwise quiet trading, while equities consolidated after Thursday's huge rally.

The survey's current conditions index climbed to 106.8 in March from 105.7 in February, while the consumer expectations component inched up to 88.8 from 88.5 last month.

"Current conditions are telling me, 'Give me the tax refund,' but expectations are saying 'Hey, unless we create a lot of jobs, I just don't think I can be terribly optimistic about the economy,"' said Steven Wood, chief economist at Insight Economics.

Jobs, or rather the lack of them, is proving the real soft spot in the economic recovery, so much so that the Federal Reserve (news - web sites) has all but promised to keep interest rates at 46-year lows until employment revives.


U.S. personal income growth outpaced consumer spending in February, according to the Commerce Department (news - web sites), as shoppers cut back on their purchases of long-lasting durable goods.

Personal income grew 0.4 percent in February, up from a revised 0.3 percent gain in January. Consumer spending rose by a less-than-expected 0.2 percent in February and real spending, adjusted for inflation, was flat on the month.

The weakness in February spending was balanced somewhat by sizable upward revisions to the previous three months' figures, but it still suggested consumption would fall short of the more optimistic forecasts in the market.

"Real spending has slowed sharply since November," noted Insight's Wood. The January/February average was 3.0 percent annualized above its fourth-quarter average, suggesting real spending this quarter would approximate last quarter's 3.2 percent pace. That would be a disappointment to some analysts who were looking for growth well above 4.0 percent.

The data also contained signs that inflation may be stirring after months, if not years, of steady decline.

The Fed's preferred measure of inflation is the core price index for personal consumption expenditures, which strips out volatile food and energy costs.

The index rose a modest 0.1 percent in February, but upward revisions to past numbers mean the annual pace of inflation ticked up to 1.1 percent from 1.0 percent in January and a trough of 0.8 percent in December.

That is still very low by historical standards, but puts the core rate back in the Fed's presumed comfort zone of 1.0 to 2.0 percent.

"Further year/year upticks are likely in March and April in both the core PCE deflator and core CPI," said Stephen Stanley, chief economist at RBS Greenwich Capital, referring to the core consumer price index.

"Thus, we are fast reaching a point where Fed officials will feel comfortable shifting the inflation risks back to full balance," he added.

Currently, the Fed characterizes the risk of disinflation as being almost equal to that of a rise in inflation. A shift to balanced would likely take it another small step toward an eventual tightening in policy.

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