US: Improving Consumer Spending

A March 1 Reuters Report indicated that the  US consumer spending increased slightly faster than expected in January as consumers dipped into their savings amid a small rise in incomes, which could help sustain the economic recovery.

The Commerce Department said on Monday spending rose 0.5 per cent, increasing for a fourth straight month, after advancing by an upwardly revised 0.3 per cent in December. Consumer spending in December was previously reported to have increased 0.2 per cent.

Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of US economic activity, to increase 0.4 per cent in January.

“The message is continuing progress for the economy, if not as fast as hoped, said Pierre Ellis, a senior economist at Decision Economics in New York.

US stock index futures held their gains on the report, while government bond prices were flat. The US dollar maintained its gains.
Consumer spending has been held back by stubbornly high unemployment and analysts worry the economy’s recovery from the most painful downturn since the 1930s could stumble in the second half of the year if spending remains lacklustre.

Analysts said it would be difficult for consumers to spend more unless income growth improved.
“You can talk about confidence all day, but if the consumers don’t have money they won’t be able to spend it,” said Scott Brown, chief economist at Raymond James & Associates in St Petersburg, Florida.

The economy expanded strongly in the second half of 2009, driven by a sharp slowdown in the rate at which business liquidated inventories. Analysts expect stock rebuilding and continued improvement in business spending to support growth into the first half of 2010.

Consumer spending rose at a modest 1.7 per cent annual rate in the fourth quarter from 2.8 per cent in the prior period.

Spending adjusted for inflation rose 0.3 per cent in January, picking up from a 0.1 per cent gain the prior month. Personal income edged up 0.1 per cent, a month after increasing 0.3 per cent in December, the Commerce Department said. That was well below market expectations for a 0.4 per cent increase.

Real disposable income fell 0.6 per cent in January, the largest decline in seven months, after increasing 0.2 per cent the prior month.

The drop in income pulled the savings rate down to an annual rate of $367.2 billion, the lowest level since February 2009.

The savings rate fell to 3.3 per cent, the lowest since October 2008, from 4.2 per cent in December.
Commerce Department data also showed the personal consumption expenditures price index, excluding food and energy, rising 1.4 per cent from a year ago in January. The index, which is a key inflation gauge watched by the US Federal Reserve, increased 1.5 per cent in December.