Solid US consumer spending buoys growth outlook

Washington: US consumer spending recorded its largest increase in more than four and a half years in March, cementing views the economy ended a dismal first-quarter on solid footing.

The Commerce Department said on Thursday that consumer spending increased 0.9 per cent after rising by 0.5 per cent in February. March's gain was the biggest since August 2009 and beat economists expectations for a 0.6 per cent rise.

Consumer spending accounts for more than two-thirds of US economic activity.

The bullish report added to data such as employment and industrial production in suggesting there was momentum in the economy at the tail end of a difficult first quarter, providing a springboard for faster growth in the April-June period.

The economy grew at an annual rate of only 0.1 per cent in the first three months of the year. Economists and Federal Reserve officials, however, pinned the slowdown on the impact of a brutal winter. A moderation in the pace of restocking by businesses, which is likely temporary, also weighed on growth.

While a separate report from the Labour Department showed an unexpected rise in the number of Americans filing for unemployment benefits last week, the overall trend in initial claims continued to point to improving labour market conditions.

Initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 344,000. Economists had forecast first-time applications for jobless benefits falling to 319,000.

Claims are volatile around this time of the year because the timing of the Easter and Passover holidays and school spring breaks makes it difficult to adjust for seasonal fluctuations.

The four-week moving average for new claims, considered a better measure of underlying labour market conditions as it irons out week-to-week volatility, rose only 3,000 to 320,000.

US Treasury debt prices trimmed losses on the data.

Broad rise in spending

In March, consumer spending was buoyed by a 1.4 per cent surge in goods purchases. Spending on durable goods rose 2.7 per cent, the largest increase since March 2010. Spending on services also increased by a solid 0.7 per cent, reflecting increased demand for utilities and health care services.

When adjusted for inflation, consumer spending increased 0.7 per cent in March after advancing 0.4 per cent in February.

March's increase in so-called real consumer spending was also the largest since August 2009.

Income increased 0.5 per cent in March, the biggest gain since August 2013, after rising 0.4 per cent in February.

Income continues to be supported by government subsidies for health care payments. Income at the disposal of households after adjusting for inflation and taxes rose 0.3 per cent after rising by the same amount in February.

With spending outpacing income growth, the saving rate, which is the percentage of disposable income households are socking away, fell to 3.8 per cent in March from 4.2 per cent in February.

The March saving rate was the smallest since January 2013.

Inflation

Despite the rise in consumer spending, inflation remained benign in March.

A price index for consumer spending rose 0.2 per cent after edging up 0.1 in February. It was up 1.1 per cent from a year ago in March, compared to a 0.9 per cent year-on-year advance in February.

Excluding food and energy, prices also rose 0.2 per cent after gaining 0.1 per cent in February. They were up 1.2 per cent from a year ago in March, compared to a 1.1 per cent year-on-year rise in February.

Both measures remain stuck well below the Fed's 2 per cent inflation target, giving the central bank room to keep benchmark interest rates near zero for a while. The Fed plans to wrap up a bond-buying program later this year, but it is not expected to move rates higher until sometime in 2015.

Source: gulfnews.com

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