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
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
The uptick was surprising enough to pull bond prices lower in
otherwise quiet trading, while equities consolidated after Thursday's
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.
EARNING MORE, SPENDING LESS
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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