U.S. consumer spending rose 0.7% in February, the largest increase since October and the eighth straight month of gains, easing some worries about the economic recovery, the Wall Street Journal reported.
After adjusting for inflation — factoring out such things as the jump in gas prices — consumption rose 0.3%, the Commerce Department said Monday (March 28).
“Consumers could have endured these higher (gasoline) prices by cutting back on discretionary purchases, but they did not,” said Ken Mayland, president of ClearView Economics.
The pickup in spending came as personal income rose by 0.3% last month, though higher prices sapped the gains. The saving rate, meanwhile, slid to 5.8%.
Congress and the Obama administration in December agreed to extend income tax cuts for Americans. The tax relief has fattened paychecks, providing consumers a cushion against rising gasoline prices.
Recreational-vehicle maker Winnebago Industries Inc. blamed gasoline prices as it watched sales fall in its second quarter. Fuel prices were also factor in a drop in first-quarter earnings for cruise-ship line Carnival Corp. Still, Carnival had better-than-expected revenue and said summer ticket prices remained strong.
Despite rising commodity prices, inflation at the consumer level is tame. A gauge closely watched by the Federal Reserve rose in February but only slightly, the Commerce Department reported. The core price index for personal consumption expenditures, which excludes food and energy prices because of their volatility, increased 0.9% on a year-over-year basis, after climbing 0.8% in January. The overall index rose 1.6% from a year earlier largely due to gasoline prices.
Separately, the National Association of Realtors on Monday said its index for pending sales of existing homes increased 2.1% to 90.8 in February from January. Year-over-year, sales were down 8.2% from their level in February 2010.
The trade group’s index tracks agreements to purchase previously owned homes. A sale is considered pending when the contract has been signed but the transaction hasn’t closed. Pending sales typically close within one or two months of signing.
The housing market is trying to recover from its collapse after a long boom. Home sales soared during the boom, lifting prices, but began sliding in 2006, leading to the bursting of the bubble. Demand has been weak since.
Sales rebounded slightly early in 2010 thanks to the home-buyer tax credits but collapsed again when those incentives expired, and there has been little talk in Congress of reviving the incentive.
There are many signs that the market remains weak. High rates of joblessness and elevated foreclosures continue to depress home values. “The housing market dynamic still looks horrible,” said Steven Ricchiuto, chief economist at Mizuho Securities.
A tax cut that began last month gave consumers the biggest jump in their incomes in nearly two years. But Americans boosted their spending only slightly, a sign that many people are being cautious with their money even as the economy improves, the Associated Press reported.
Consumers increased spending 0.2% in January, the smallest gain since June, the Commerce Department reported Monday. Personal incomes jumped 1%, reflecting the 2 percentage point reduction from the Social Security tax cut.
The small spending gain pushed total spending last month to an annual rate of $10.59 trillion, up 7.4% from the recession low hit in December 2008. Some economists said that poor weather may have played a role in slowing spending growth last month. They are counting on spending to increase throughout the year, which would help the economy grow.
Separately, the National Association of Realtors (NAR) said fewer people signed contracts to purchase homes in January, the latest evidence that the housing market is struggling. The trade group said its index of sales agreements for previously occupied homes fell 2.8% last month to a reading of 89.9.
That’s higher than the 75.9 reading from June, the low point since the housing bust. But it’s below 100, which is considered a healthy level. The last time it reached that point was in April, the final month people could qualify for a home-buying tax credit.
Consumer spending was growing at the fastest pace in four years in the final three months of 2010, helping to support the overall economy. But the weak showing in January raised questions about how strong spending will be going forward.
The modest 0.2% rise in spending was even weaker when inflation was taken into account. After adjusting for price changes – particularly a steep rise in energy costs – spending actually dipped 0.1% in January. That was the poorest showing since inflation-adjusted spending had fallen 0.8% in September 2009.
“Overall we expect consumption to be fairly strong in the first half of the year. But the way things are going at the moment, all the payroll tax cut will do is offset the rise in gasoline and food prices, rather than provide a boost to real spending,” said Paul Dales, senior economist at Capital Economics.
The latest survey by the National Association for Business Economics released Monday predicted consumer spending will rise 3.2% this year, up significantly from the actual spending gain of 1.8% in 2010.
The Social Security tax cut will give the typical family an extra $1,000 to spend this year. But the recent surge in gasoline prices has raised worries that consumers may need to spend the extra money on fuel, and not new goods and services.
For January, consumers boosted spending on durable goods, items like new cars, and on nondurable goods such as food and gasoline. But they trimmed spending on services.
The 1% rise in incomes in January would have been a much more modest 0.1% gain if the effects of the tax changes had been excluded.
The rise in incomes and small increase in spending meant that the personal savings rate rose in January. Households saved 5.8% of their after-tax incomes, up from 5.4% in December. For all of 2010, the savings rate was 5.8%. That’s down slightly from 5.9% in 2009.
Consumers are buying more luxury items but spending remains tight for everyday essentials such as food and dental care, a USA TODAY analysis finds, suggesting a growing divide between haves and have-nots.
Purchases of TVs, jewelry, recreational vehicles and pet supplies are growing robustly, government data show. At the same time, spending on medical care, day care and education is down in the dumps.
“The rising tide isn’t lifting all boats,” says Carl Steidtmann, chief economist at the Deloitte accounting and consulting firm and author of an index tracking consumer spending.
He says higher-income and older households, helped by a strong stock market, are experiencing increased wealth and spending more. However, high unemployment is pulling in the other direction, depressing spending among people without jobs and those anxious about job security.
Consumer spending accounts for about 70% of the nation’s economy and is crucial to any recovery. Spending rose 1.4% in the first eight months of this year compared with the same period a year earlier, the Bureau of Economic Analysis reports. Consumers are on track to increase spending for the first time since 2007.
Yet more than one-third of the 350 spending categories tracked by the government remain in decline, as if the recession that technically ended in June 2009 was still underway. Spending on new cars has fallen another 8.2% this year, on top of disastrous drops in 2008 and 2009. Consumers are spending less on prescription drugs, life insurance and a wide range of everyday essentials while spending more on watches, wine and toys. Part of the jump in luxury items is a rebound from deep lows in the recession. What’s hot now:
- Televisions. Spending is up 34.7% this year, tops among consumer items. “There is a lot of excitement” because of 3-D TVs, bigger panels and high definition, says Best Buy’s Scott Morris.
- Recreational vehicles. Winnebago Industries Inc. sales have doubled. The company added 350 workers. Buyers — typically 55 or older — are purchasing somewhat less expensive RVs, says Winnebago spokeswoman Sheila Davis.
- Pet supplies. Organic dog food, timed cat food dispensers and other high-end pet items are driving healthy increases in spending, says Bob Vetere, president of the American Pet Products Association. “People are cutting back on themselves more than they’re cutting back on pets,” he says.
Pet products illustrate how some consumers are going high end and others low end. Cheap pet food is selling briskly, reflecting the weak economy, at the same time costly items are thriving, he says. It’s the middle of the market that’s shrinking, he says.
Entertainment that depends on mass appeal is still hurting. Spending at concerts, movie theaters and casinos is down.
The revenue decline at casinos is starting to stabilize, says Frank Fahrenkopf Jr., president of the American Gaming Association. “We’re not going to see a dramatic turnaround until employment picks up,” he says. “We’re still packing people in. They’re just spending less.”