Consumer Spending Slows on Higher Food, Fuel Costs

Monday, 28 Feb 2011 08:45 AM

 

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Consumer spending in the U.S. rose less than forecast in January as increasing food and fuel prices caused Americans to cut back on other goods and services.

Purchases increased 0.2 percent, the smallest gain since June and half the median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed today in Washington. Incomes climbed more than projected, reflecting the tax-cut compromise reached by President Barack Obama and Congressional Republicans in December, and inflation remained below the Federal Reserve’s long-term forecast.

While tax savings and rising confidence in the recovery indicate households will keep shopping, purchases may be tempered by the highest gasoline costs in two years and 9 percent unemployment. After adjusting for changes in prices, the data signal the economy will get less of a boost from Americans’ spending in the first quarter than the prior three months.

“Consumers stumbled a bit to start the year,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note before the report. “While we expect them to pick up the pace some in coming months, the recent rise in energy prices poses a notable headwind.”

Stock-index futures held earlier gains after the report. The contract on the S&P 500 Index maturing in March rose 0.5 percent to 1,324.8 at 8:35 a.m. in New York.

Less Than Forecast

The median estimate of 71 economists surveyed by Bloomberg News called for a 0.4 percent advance in spending. Projections ranged from increases of 0.2 percent to 0.5 percent. The Commerce Department revised the December spending figure down to 0.5 percent from a previously reported 0.7 percent gain.

Incomes advanced 1 percent, the most since May 2009, and more than double the median forecast of 0.4 percent, according to the Bloomberg survey.

Disposable incomes, or the money left after taxes, rose 0.7 percent in January, the most since April. Excluding the benefits of the tax changes, the increase in disposable incomes would have been 0.1 percent, the Commerce Department said.

Wages and salaries rose 0.3 percent for a second month.

The savings rate increased to 5.8 percent from 5.4 percent.

Today’s report also showed inflation stabilized. The gauge tied to spending patterns increased 1.2 percent from January 2010, the same as in the prior 12 months.

Inflation Measures

The Fed’s preferred price measure, which excludes food and fuel, rose 0.1 percent from the prior month and was up 0.8 percent from a year earlier, matching December’s year-over-year gain. The median forecast in the Bloomberg survey showed increases of 0.1 percent from the prior month and 0.8 percent from January 2010.

Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending fell 0.1 percent, the first decline in a year.

Weather may have also depressed spending last month as shoppers stayed away from stores. Winter storms spread from the Midwest and the South to New England, covering 71 percent of the country with snow on Jan. 12, according to the National Climatic Data Center.

Fed policy makers are awaiting further proof of a durable pickup in the labor market that will spur growth, one reason why they plan to complete a second round of monetary stimulus worth $600 billion by June.

The economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated, as state and local governments made deeper cuts in spending, Commerce Department figures showed on Feb. 25. Consumer purchases rose at a 4.1 percent pace, the most since the same three months in 2006, compared with a 4.4 percent rate originally estimated.

Rising Costs

Rising food and fuel costs may strain household budgets, at the same time higher commodity costs risk prompting companies to raise prices to protect profits. Oil topped $100 a barrel last week amid unrest in the Middle East. Regular fuel, which in January was higher than the December average, jumped to $3.29 a gallon last week, the costliest since 2008, according to AAA, the nation’s biggest motoring organization.

Households may find some relief due to a reduction in payroll taxes of 2 percentage points, the extension in December of President George W. Bush’s tax cuts, and renewal of emergency jobless benefits for the long-term unemployed. Stock market gains have also helped repair consumer finances.

Confidence Grows

Americans’ confidence increased in February to the highest level in almost three years, the Bloomberg Consumer Comfort Index showed last week, as households grew less pessimistic about their finances. The measure corroborated changes in gauges like the Thomson Reuters/University of Michigan.

Target Corp., the second-largest U.S. discount retailer, projected sales at stores open at least a year may rise as much as 5 percent this year, after a 2.1 percent gain the prior period. In the fourth quarter ended Jan. 29, sales showed surprising strength at times, followed by unexpected weakness, executives said.

“Consumer optimism is once again increasing,” Kathryn Tesija, executive vice president of merchandising, said on a conference call with investors on Feb. 24. Even so, customers are “focused on controlling household budgets, leading to increased coupon use and a focus on promotions.”

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