Consumers Refuse to Spend as Confidence, Incomes Increase

Friday, 28 May 2010 03:57 PM

 

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Consumer spending unexpectedly stalled in April after six straight months of gains, but rising income and consumer confidence pointed to solid consumption this quarter.

Although Friday's reports were mixed, analysts said they still painted a picture of an improving domestic economy at a time when a fiscal crisis in Europe was casting a shadow over the recovery in that region.

"We basically have a home grown expansion starting up in the U.S. and I don't think it matters all that much that Europe is having its own problems. But if it spirals into a general financial panic, that will be a problem," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

The debt crisis, sparked by Greece's huge budget shortfall, has caused havoc in global financial markets and raised fears that spending cutbacks by some governments in Europe could slow the world economy and push some countries back into recession.

While U.S. consumer spending was unchanged in April, real disposable income recorded its biggest gain in nearly a year, the Commerce Department data showed, boosted by a combination of an improving labor market and tame inflation.

Financial markets had expected consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, to increase 0.3 percent after a 0.6 percent rise in March.

Separately, the Thomson Reuters/University of Michigan's index of consumer confidence edged up to 73.6 this month from 72.2 in April.

Even more encouraging, a measure of consumers' expectations on the outlook for the economy over a 12-month horizon was the highest since January.

Analysts attributed the improvement in consumers' view of the economy's prospects to the firming jobs markets.

"The resumption of moderate net job creation is translating into solid income growth, which will bolster future consumer spending and add momentum to the economy," said Robert Dye, a senior economist at PNC Financial Services in Pittsburgh.

Employers have added jobs for four straight months and analysts expect a report next Friday to show the trend continued in May. A Reuters survey forecast payrolls grew 503,000, though at least half of the gain would be related to government hiring for the decennial census.

Another report showed manufacturing activity in the country's Midwest region slowed slightly this month after scaling a five-year high in April. The Institute for Supply Management-Chicago report came ahead of Tuesday's release of data on overall U.S. manufacturing activity.

The Institute for Supply Management report next week will probably show continued expansion in the manufacturing sector, according to a Reuters survey. Manufacturing has been the main driver of the economy's recovery from the worst recession since the 1930s, but consumers are now participating.

U.S. stocks fell on the mixed data, and extended losses on news Fitch Ratings had stripped Spain of its top-tier rating, bringing concerns about Europe back into focus.

U.S. government debt rose, while the dollar was up versus the euro.

Securing a stronger recovery is a key goal for President Barack Obama as tough tests loom for his fellow Democrats in November's congressional elections.

Voters are in anti-Washington mood over the recent recession, Wall Street's role in the crisis, job losses and the weak housing market, and the Democrats' majority control of Congress is at stake.

Despite weakness in April, analysts expect strong spending in the second quarter as a firming labor market boosts household incomes and tame inflation bolsters spending power.

Government data on Thursday showed real consumer spending rose at a 3.5 percent annual rate in the first quarter, more than double the 1.6 percent pace in the fourth quarter.

"We do not expect household spending to flatline in coming months. With the help of an improving labor market, we look for real consumer expenditures to continue to advance at a moderate pace over the course of this year," said Michelle Girard, a senior economist at RBS in Stamford, Connecticut.

Last month, personal income rose 0.4 percent and inflation-adjusted, after-tax incomes increased 0.5 percent in April, the largest gain since May 2009

With spending flat and income rising, the saving rate climbed to 3.6 percent from 3.1 percent in March.

A key inflation gauge monitored by the Federal Reserve rose 1.2 percent in the 12 months to April, the smallest rise since the period through September.

The combination of tame inflation and excess capacity in the economy, even as the recovery gains traction, means more room for the U.S. central bank to hold benchmark interest rates ultra low for an extended period.

© 2014 Thomson/Reuters. All rights reserved.

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