Consumer spending up, but savings plummet

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Published: May 3,2010

Tags: consumer spending, savings

WASHINGTON — Consumer spending rose in March by the largest amount in five months but the gains were financed out of savings, which fell to the lowest level in 18 months. A slight rise in incomes added to concerns that the recovery could weaken unless income growth increases more rapidly.

The Commerce Department said consumer spending rose 0.6 percent in March, matching economists’ expectations. Personal incomes edged up just 0.3 percent, raising new worries about lackluster income growth.

The March surge in spending was propelled by savings, which drove the personal savings rate down to 2.7 percent of after-tax incomes, the lowest level since September 2008.

The fear is that income growth will remain weak, reflecting severely high unemployment, as the job market continues to show the effects of the nation’s worst recession since the Great Depression.

Unless businesses boost hiring, households will not have the incomes needed to support consumer spending, which accounts for 70 percent of economic activity. That would put the economic recovery in jeopardy.

Two other reports offered more a mixed picture of the recovery.

Commerce said construction spending rose 0.2 percent in March, the first increase in five months. But all the strength came in government activity as private sector building fell to the lowest level in a decade. Weakness in construction remains a drag on the economy.

In the meantime, U.S. manufacturing is helping sustain the rebound. Factory activity expanded at the fastest pace in nearly six years, according to a report from the Institute for Supply Management, a trade group of purchasing executives. It said its manufacturing index rose to 60.4 in April from 59.6 in March. It’s the ninth straight month of growth. A level above 50 indicates expansion.

But some economists caution that the overall picture is clouded by a weak jobs picture. A report due out this Friday is expected to show no change in the nation’s 9.7 percent unemployment rate.

“The consumer needs job creation and income growth to pick up significantly to maintain the momentum in consumer spending and we look to Friday’s employment report for further evidence of slow improvement in labor market conditions,” analysts for RDQ Economics wrote today in a research report.

The government reported Friday that the broadest measure of economic activity, the gross domestic product, grew at an annual rate of 3.2 percent in the January-March period. That marked the third quarterly increase since last summer. Most economists believe the recession, which began in December 2007, probably ended in either June or July or last year.

The healthy first quarter GDP gain was driven by a big rebound in consumer spending, which powered ahead at an annual rate of 3.6 percent, the best showing in three years. But economists said spending gains of that size cannot be maintained without greater income growth.

The 0.3 percent rise in incomes in March followed a tiny 0.1 percent increase in February and a 0.4 percent advance in January.

The 0.6 percent rise in consumer spending, which matched last October’s gain, followed a 0.5 percent rise in February and a 0.3 percent January increase.

Disposable, or after-tax incomes, rose by 0.3 percent in March. The combination of a rapid rise in spending and a smaller gain in incomes left the personal savings rate at 2.7 percent in March, down from 3 percent in February and the smallest showing since the savings rate stood at 2.2 percent in September 2008.

During the housing boom of the last decade, the annual savings rate had fallen as low as 1.7 percent in 2007. Consumers felt more wealthy as their home values soared and therefore felt less of a need to save. However, after housing sales and prices collapsed, helping to send the country into a deep recession, Americans began saving more. The savings rate rose to 4.3 percent in 2009, the highest level in a decade.

In a new AP Economy Survey, two-thirds of the 44 economists surveyed said they believed the last recession had created a “new frugality” among consumers that will outlive the recession. A desire to save more could also act as a drag on spending going forward.

An inflation gauge tied to consumer spending showed a slight 0.1 percent rise in March and the same 0.1 percent increase excluding food and energy. Over the past 12 months, prices excluding food and energy are up by just 1.3 percent, well within the Federal Reserve’s comfort zone.

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