March 29, 2024

Split U.S. Economy in Data

Despite a measure of caution on the part of consumers, new data on Friday suggested that the economy had underlying strength. Factories reported a healthy gain in output in February, and inflation remained under control, even though gasoline prices have been rising sharply.

Led by the automobile sector, industrial production jumped 0.7 percent in February, the biggest gain in three months, the Federal Reserve said. Economists had been expecting a 0.4 percent rise.

By contrast, the Thomson Reuters/University of Michigan’s preliminary reading for consumer sentiment in March showed a marked drop; the index fell to 71.8, from 77.6 in February. That was its lowest level since December 2011.

The split in the data underscores the wider crosscurrents buffeting the economy.

On one hand, the stock market is near record levels, big companies are reporting strong profits and the labor market seems to be finally gaining some steam, with better data last week and this week on unemployment. In particular, the addition of 236,000 new jobs in February spurred hopes that the economy was finally producing enough jobs to lower the unemployment rate, which has been stuck at just under 8 percent since last September.

In recent days, many economists have raised their estimates for growth in the first quarter in light of other signs, like the move by businesses to increase inventories that fell in the final quarter of 2012. The housing sector has also been strong — a trend that may get more confirmation next week, when new data on housing starts and home sales will be released.

Still, consumers are being hit by the restoration of full Social Security taxes, which went into effect in January, in addition to feeling the effects of federal spending cuts that began March 1. Many experts estimate that the federal budget cuts could cost the economy more than 700,000 jobs this year. In the Thomson Reuters/University of Michigan survey, consumers were more concerned about growth in the future, rating current economic conditions more positively.

Gasoline prices have also been rising, putting additional pressure on some consumers. Higher gas prices helped lift the Consumer Price Index 0.7 percent in February, although the less volatile core reading was up 0.2 percent, according to other data released Friday by the Labor Department.

The jump in taxes and gas prices is squeezing lower-income consumers in particular, said Steve Blitz, chief economist at ITG Investment Research. Big-ticket items like homes and cars continue to sell well, for example, but otherwise-strong retail sales data out earlier this week showed that spending at restaurants declined for the second month in a row. “People who can’t afford it aren’t going out as much to eat,” he said.

“I think we’ve got two economies,” said Mr. Blitz. “The industrial economy started to pick up at the end of last year, but it doesn’t grow in lock step with consumers.”

Factory production and hiring is being bolstered in part by a rebound in China, said Ian Shepherdson, chief economist for Pantheon Macroeconomic Advisors. The Chinese economy, the world’s second-largest, slowed last summer and fall but has gained momentum more recently.

While that is good news in the long run for the American economy and the job market, it affects companies much more than consumers. “Right now, consumers are feeling something up close and personal with higher gas prices and higher taxes,” he said.

Mr. Shepherdson expects the economy to grow by more than 2 percent in the first quarter but to slow substantially in the second and third quarters as the cuts in Washington take hold.

“There will be a hit from the austerity, but the timing and extent is difficult to determine,” he said. “If you impose an enormous fiscal tightening on an economy that isn’t growing too quickly, you have to have some adverse consequences.”

Article source: http://www.nytimes.com/2013/03/16/business/economy/consumer-inflation-jumps.html?partner=rss&emc=rss

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