Consumer spending in the U.S. climbed in February by the most in five months as incomes rose, signaling an improving job market is spurring demand, according to a Bloomberg report.
Household purchases, which account for about 70% of the economy, gained 0.7% after a 0.4% advance the prior month that was bigger than previously estimated, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 78 economists called for a 0.6% rise. Incomes increased 1.1%, more than projected, sending the saving rate up from a five-year low.
Labor market progress and an increase in household wealth linked to rising home values and stocks are helping Americans cushion the fallout of higher payroll taxes and costlier fuel. Strength in purchases is one reason economists project the economy picked up this quarter after slowing to a 0.4 percent annual rate in the final three months of 2012.
“The economy is in a very good place right now ahead of the fiscal restraint,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This recovery is sustainable. Consumers are in the driver’s seat.”
Stock markets in the U.S. were closed today for the Good Friday holiday.
Projections for spending ranged from gains of 0.3% to 0.9%. The January reading was previously reported as an increase of 0.2%.
Consumers’ confidence has wobbled in March — but economists’ confidence is rising quickly.
USA Today reported that even as the Conference Board reported Tuesday (March 27) that budget fights in Washington dragged down its consumer confidence index for March, economists are quietly raising forecasts for first-quarter economic growth to as much as a 3% annual clip.
That’s well above the 1.8% median in a USA Today survey of economists last month. Economists’ improving outlooks also come despite the increases in middle-class payroll taxes and top-bracket income-tax rates on Jan. 1 and the beginning of sharp federal spending cuts on March 1.
The conflict is about watching what people do, not what they say.
Forecasts have been raised both because consumers have spent more than expected and because business executives who had reported being rattled by the uncertainty from Washington have raised investment anyway.
The latest evidence was the 5.7% gain in durable-goods orders for February announced Tuesday, said Michael Hanson, an economist at Bank of America Merrill Lynch. Faster jobs growth has also helped, said UBS economist Drew Matus.
“Jobs trump Washington folly,” Matus said. “The primary driver is that people aren’t worried about being laid off any more.”
The latest forecasters to change their first-quarter outlooks include:
• Bank of America Merrill Lynch, which says the economy is growing at a 3% annual clip this quarter, up from a 1% forecast at the end of the year. The bank says richer consumers, buoyed by rising stocks and home prices, are leading the way.
• Barclays, which said Tuesday that the durable goods report put first-quarter growth on a 2.6% annual pace, up from 1.5% in December.
• JPMorgan Chase raised its forecast to 2.7% from 2.3% Tuesday, citing more inventory growth.
• IHS Global Insight, which is up to 2.9% projected growth from 1.0% in mid-January.
The government estimates the economy grew only 0.1% in the fourth quarter, but a new estimate due Thursday is expected to be as high as 0.7%.
The Conference Board said its consumer confidence index fell 8.3 points to 59.7 this month, on a scale in which 100 reflects the level of confidence in 1985. But the index rose 9.6 points last month, leaving confidence about the same as two months ago.
Consumers are wavering between worrying about Washington and feeling better about their own finances amid recovering housing and job markets.
An example of the latter is Tuesday’s Standard & Poor’s/Case-Shiller Index report, showing January home prices staged their biggest 12-month gain since 2006, said Conference Board economist Ken Goldstein.
Consumers who have been replacing worn-out cars as that industry recovers from the recession need furniture and appliances too, he said.
“I’m not sure they’ve really made up their mind,” Goldstein said.
“If it was just about the economy, and about economic indicators, we would not be seeing the zig-zag in consumer confidence. My guess is that consumers will decide that they’ve waited so long to buy appliances and furniture that they will decide it’s time.”
Federal Reserve officials Wednesday (March 20) acknowledged the recent pick-up in economic growth, noting in particular “labor market conditions have shown signs of improvement,” but the central bank made no change in its ongoing aggressive stimulus programs.
The Los Angeles Times reported that Fed policymakers, after their two-day meeting, voted 11 to 1 to keep buying $85 billion of Treasury and mortgage securities every month.
And as expected, they left the short-term interest rate at near zero, where it has been since late 2008. Fed policymakers repeated they would keep the interest rate at that level as long as the jobless rate is above 6.5% and the inflation outlook remains close to its target rate of 2%.
Most Fed officials don’t see the unemployment rate, currently 7.7%, reaching 6.5% until 2015.
Despite the recent improvement in the economy, the Fed’s updated economic outlook actually forecast growth this year to come in slightly less than the central bank’s previous projections in December.
That is presumably because of the federal spending cuts that kicked in March 1 under sequestration, something the Fed pointed to in its statement Wednesday, saying “fiscal policy has become somewhat more restrictive.”
The Fed reduced its forecast for economic growth this year, saying the economy would expand at no greater than 2.8%, down from a projected maximum of 3% made in December.
At the same time, the Fed lowered its projection for the unemployment rate, saying it would range from 7.3% to 7.5% by the fourth quarter. The forecast in December was 7.4% to 7.7%.
The latest statement from the Fed, coming after a two-day policy meeting, has been eagerly anticipated as the economic recovery has accelerated in recent weeks.
Job growth in February exceeded analyst expectations. The economy added 236,000 net new jobs that month and the unemployment rate fell to 7.7%, the lowest level since the end of 2008.
Since 2008, the Fed has been engaged in unprecedented attempts to stimulate the economy by keeping short-term interest rates near zero and dramatically expanding its balance sheet.
The central bank’s latest, and most ambitious, effort began in the fall as the Fed began purchasing $85 billion in bonds a month to hold down long-term interest rates in hopes of increasing spending by businesses.
Confidence among American consumers unexpectedly slumped in March, which may signal a cooling in spending, the biggest part of the economy.
According to a report by Bloomberg, the Thomson Reuters/University of Michigan preliminary sentiment index for March fell to 71.8, the lowest level since December 2011, from 77.6 in February. The gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg.
Concern may be starting to mount over the damage that automatic across-the-board federal spending cuts will cause the economy and hiring. That may keep tempering optimism created by record stock prices, a hiring pickup, and a housing rebound that have so far helped propel bigger-than-forecast gains in spending.
“There was a little bit of a sequester-news related dip in confidence,” said Jim O’Sullivan, chief U.S. Economist at High Frequency Economics in Valhalla, New York. “Certainly on the minus side you have fiscal tightening, but on the plus side you’ve got the improving labor market.”
Forecasts ranged from 70 to 82.5, according to the Bloomberg survey. The index averaged 64.2 during the recession ended in June 2009, and 89 in the five years prior to the 18- month slump.
Consumers in today’s confidence report said they expect an inflation rate of 3.3% over the next 12 months, the same as in the prior two months. Over the next five years, Americans expected a 2.9% rate of inflation, down from February’s 3%.
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Sales at U.S. retailers rose in February by the most in five months as an improved job market and stronger household finances cushioned the effect of higher payroll taxes, according to a report by Bloomberg.
The 1.1% advance exceeded all projections in a Bloomberg survey and followed a revised 0.2% gain in January, Commerce Department figures showed today in Washington. The median forecast was for a 0.5% advance. Sales excluding the volatile categories of autos and gasoline rose 0.4%.
Progress in the job market is shoring up sentiment and spurring demand at merchants including Costco Wholesale Corp., easing the burden of a two percentage-point increase in the levy that funds Social Security. The boost to household wealth from home values and stock prices has also helped consumers maintain spending in the face of higher fuel prices.
“It shows some steady underlying strength,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey, the second-best forecaster of retail sales in the last two years, according to data compiled by Bloomberg. “These numbers are cause for cautious optimism.”
Eight of 13 major categories showed increases last month, led by a 5% jump in receipts at gasoline stations that reflected higher fuel costs. Sales also climbed at building materials outlets, auto dealers and general merchandise stores.
Spending increased 1.1% at auto dealerships in February after a 0.3% drop a month earlier.
Pent-up demand for motor vehicles contributed to the increase as an aging fleet and cheap borrowing drew customers to dealer lots. Cars and light trucks sold at a faster pace in February, pushing the annualized rate of sales to 15.3 million from 14.4 million a year ago, according to data from Ward’s Automotive Group.
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Friday’s jobs report showed that U.S. labor markets are making progress, but likely not enough to convince Federal Reserve officials that it’s time to pull back on the easy-money programs they’ve put in place to rev up economic growth and hiring.
According to a report by The Wall Street Journal, when the Fed next meets March 19-20, officials are likely to acknowledge job-market improvements in recent months. But their recent comments suggest they are unlikely to shift from their plan to purchase $85 billion per month of Treasury and mortgage-backed securities to help keep short-term interest rates pinned near zero.
Much of the research coming out of the Fed in recent months has found notable benefits from bond buying in the form of lower long-term interest rates, which help to drive spending and investment, particularly interest-sensitive sectors like housing. However internal and outside critics worry the programs could fuel higher inflation or market instability
Top Fed officials have made clear that the labor market’s health is their primary worry right now, and it’s the main factor in determining how long they will continue the bond-buying program. The Fed has said it wants to see “substantial progress” in the job market before pulling back on bond buying, which would require several more encouraging job reports like Friday’s.
Payroll gains have averaged 205,000 per month for the past four. That’s one important sign of progress, but Fed officials have reservations about concluding too quickly that the job market has healed or that the outlook for job growth has turned substantially better.
The unemployment rate, at 7.7% in February, is little changed since September, when it was 7.8%. Fed Vice Chairwoman Janet Yellen in a speech Monday, said “the unemployment rate is probably the best single indicator of current labor market conditions.”
Other details in Friday’s unemployment statistics suggested a job market not yet back to full health. More than 100,000 Americans left the labor force in February and the share of the population that’s employed, at 58.6%, hasn’t improved in the past year. Meantime, the share of workers who have been unemployed for six months or more inched up in February, as did the number of Americans who wanted full-time work but could only find part-time jobs.
President Barack Obama and Senate Republicans had a constructive conversation about fiscal policy and other matters on Wednesday (March 6) night, a White House spokesman said, but neither the administration nor the GOP on Thursday predicted a quick agreement about taxes and spending.
According to a report by MarketWatch, Obama “said that there seemed to be sincere interest in avoiding constant crisis, sincere interest expressed by the participants in the dinner,” White House press secretary Jay Carney told reporters at a regular briefing.
But he followed up by saying, “We’re not naive about the challenges that we still face. They exist and there are differences.”
Sen. Pat Toomey, a Pennsylvania Republican who was one of a group of Republican senators that dined with Obama at a Washington restaurant on Wednesday night, said Thursday that the meeting was “very cordial” and “substantive.” He also underscored Republicans’ push for deep spending cuts and the party’s opposition to tax increases, which lawmakers will wrestle with beginning next week as each party offers fiscal 2014 budgets.
“Unless we curb the spending and bring spending under control,” Toomey said after a speech at the Heritage Foundation, “we’re not going to have the kind of growth we need.”
Early next week, House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, is planning to unveil his plan to balance the government’s budget in 10 years. A competing blueprint is expected from Senate Budget Committee Chairman Patty Murray, a Washington Democrat.
Given the parties’ fundamental disagreement over tax increases, the documents will set the stage for more wrangling over fiscal policy just as the government approaches a late-March deadline to pass separate stopgap funding. Without passing a short-term bill by March 27, the government would face a partial shutdown. The House has passed a bill to avert the shutdown by funding the government through the end of the current fiscal year on Sept. 30, and the Senate is preparing to act on that measure.
Automatic budget cuts set to go into effect this week will slow the already sluggish U.S. economy even further, Federal Reserve Chairman Ben Bernanke warned senators Tuesday (Feb. 26).
According to a report by CNN Money, the recovery is already moderate as it is, and upcoming cuts add an additional “significant” burden, Bernanke said in prepared testimony.
Forecasts from the Congressional Budget Office suggest that deficit-reduction policies — including the automatic cuts taking effect Friday — will slow the U.S. economy by 1.5 percentage points this year. Bernanke cited those figures in his testimony, a semi-annual report to Congress.
“Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions,” he said in prepared testimony.
Bernanke has long warned lawmakers that monetary policy, which the Federal Reserve oversees, can only do so much to boost the U.S. economy. He said Congress needs to reduce the deficit over the long term without threatening short-term economic growth.
“The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy,” he said.
Bernanke urged Congress to consider tax and spending policies “that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure.”
“Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face,” he said.
Bernanke also came to the hearing prepared to defend the Fed’s stimulus efforts against its critics.
Under more normal circumstances prior to the Great Recession, the Fed typically operates by lowering interest rates to spur economic growth, or vice versa.
But with short-term rates already parked near zero, the Fed has turned to alternative policies that include purchasing mortgage-backed securities and long-term Treasury bonds.
Those bond purchases are intended to lower interest rates even further. But they worry many observers who wonder if the Fed will be able to pull back the policy when the economy eventually gets going again at a stronger pace.
Responding to those criticisms, Bernanke said Tuesday that he “remains confident that it (the Fed) has the tools necessary to tighten monetary policy when the time comes to do so.”
The nation’s economy and job-creating engine will start to purr later this year as business activity picks up — more than offsetting federal government cutbacks, predict economists surveyed by USA Today.
After starting the year slowly, the economy will shift into a higher gear this summer and then grow for the next nine months at the fastest pace in three years, according to the median estimates of 46 economists.
“I think we’re really on the verge of this becoming a self-sustaining recovery,” said Richard Moody, chief economist at Regions Bank.
The economists expect average monthly job gains of 171,000, with the pace quickening late this year. They expect unemployment to fall from 7.9% to 7.5% by year’s end. In October, economists surveyed predicted average monthly gains of 155,000 jobs.
Several said they raised their forecasts in part after the government this month revised up its estimate of average monthly job growth from 153,000 each of the past two years to 175,000 in 2011 and 181,000 in 2012.
The revisions reflect a job market that’s expanding more rapidly than previously believed, Moody said.
The first half of 2013 is expected to be sluggish as government spending cuts dampen growth and a payroll tax increase crimps consumer spending. Those surveyed expect the economy to grow at less than a 2% annual rate the first six months of 2013.
But Congress and the White House averted a worse fate by agreeing in January to keep income taxes stable for households earning less than $450,000 a year. Thirty-seven percent of the economists are more optimistic about this year’s outlook than they were three months ago.
What’s more, the economists expect the effects of the federal cuts to fade by the fourth quarter, with growth picking up to a 2.7% pace. They said the housing market is rebounding, a rising stock market is boosting consumer wealth, the European financial crisis is easing and corporate America is cash-rich.
Economists are increasingly, but still cautiously, optimistic about growth in the year ahead with hiring expected to pick up in coming months.
According to an Associated Press report, a quarterly survey by the National Association for Business Economics released Monday (Jan. 28) shows half of the economists polled now expect real gross domestic product — the value of all goods and services produced in the United States — to grow between 2% and 4% in 2013. That’s up from 36% of respondents who felt the same way three months earlier.
About half expect sluggish or negative performance, down from 65% in October.
The latest survey was conducted between Dec. 20 and Jan. 8 and asked 65 economists and others who use economics in the workplace about conditions at their firms or industries. It found that 34% of firms now expect to expand their payrolls in the next six months, the highest percentage since April of last year. Meanwhile, 2% said they expect their companies to cut payrolls through layoffs, while 14 percent see payrolls trimmed through attrition.
A quarter of respondents also said employment grew at their firms in the fourth quarter, which is comparable to the levels seen in the first half of 2012. The same percentage also reported a rise in wages at their firms in the final three months of the year, up 10 percentage points from the last survey.
Overall sales growth was stable in the fourth quarter with results mixed across industries. For instance, growth slowed in the services, finance, insurance and real estate sectors, but rose in the transportation, utilities, information and communications sectors.
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