November 29, 2020

Higher Prices Eat Into Consumer Spending Gains

Consumer spending increased 0.4 percent in April for a 10th consecutive month of gains, the Commerce Department said on Friday, after rising 0.5 percent in March.

But prices rose 0.3 percent, leaving spending up just 0.1 percent and incomes stagnant when adjusted for inflation.

Tornadoes and floods, which lashed parts of the country last month, were blamed in part for an 11.6 percent decline in contracts to buy previously owned homes last month.

“We see the soft patch of the first quarter bleeding, at least, into the first half of the second quarter,” said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

“We will see again a consumer that can keep pace with the economy, but cannot drive the economy forward.”

Recent data including retail sales and industrial output have been soft, prompting economists to lower their growth forecasts for the second quarter. Further cuts are likely next week should May auto sales come in very weak.

Second-quarter forecasts for the rate of growth in gross domestic product are ranging from 2.5 to 3 percent.

The government reported on Thursday that consumer spending — which accounts for about 70 percent of the nation’s economic activity — grew at a 2.2 percent annual rate in the first quarter, slowing from a 4 percent clip in the final three months of 2010.

That contributed to holding back overall economic growth to a 1.8 percent rate during the quarter after a 3.1 percent rate in the October-December period.

With much of the slowdown attributed to what United States policy makers see as temporary factors, like high commodity prices and supply chain disruptions because of the earthquake in Japan, the Federal Reserve is not expected to worry too much about the rate of recovery.

The central bank is expected to keep interest rates low after it wraps up its $600 billion government bond-buying program in June before it starts looking at ways to withdraw some of the stimulus it has lent the economy.

The high gasoline prices swallowed almost all the increase in incomes from tax cuts enacted in December.

Economists worry that stagnant incomes, which have failed to keep up with inflation, will continue to impede spending even though fuel prices are starting to fall.

So far, consumers have resorted to saving less, and some are tapping into their savings to maintain spending. Incomes rose 0.4 percent last month, but disposable incomes adjusted for inflation were flat for a second consecutive month.

Real incomes have not grown this year and the saving rate stayed at a two-and-a-half-year low of 4.9 percent in April. According to the Commerce Department’s chief economist, Mark Doms, Americans saved $82 less over the last four months.

The retreating price for gasoline helped to lift consumer spirits this month and lower their inflation expectations.

The final version of the Thomson Reuters/University of Michigan consumer sentiment survey showed sentiment among Americans rose this month to 74.3, from 72.4 in the preliminary May reading.

High gasoline prices pushed up the year-on-year inflation rate to 2.2 percent, the biggest rise in a year, after increasing 1.8 percent in March.

Excluding food and energy, prices increased 1 percent, the largest gain since September, after rising 0.9 percent in March.

Article source: http://feeds.nytimes.com/click.phdo?i=6295edae5aa7026a206500befc7e6dc2

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