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Consumer spending up, sign of decent recovery

By JEANNINE AVERSA (AP) (Originally posted March 30, 2010)

WASHINGTON — Consumers spent modestly last month, a sign that the economic recovery is proceeding at a decent — but not spectacular — pace.

The Commerce Department reported Monday that consumers boosted their spending by 0.3 percent in February. That was a tad slower than the 0.4 percent increase registered in January and marked the smallest increase since September. Still, the increase in spending was considered a respectable showing, especially given the snowstorms that slammed the East Coast and kept some people away from the malls. It marked the fifth straight month that consumer spending rose.

Americans’ incomes, however, didn’t budge.

Incomes were flat in February, following a solid 0.3 percent gain in January. It marked the weakest showing since July, when incomes actually shrank. Income growth is the fuel for future spending. February’s flat-line reading suggests shoppers will be cautious in the months ahead.

Spending growth in February matched economists’ expectations. The reading on income was a bit weaker than forecast.

Both the spending and income figures in Monday’s report point to a modest economic recovery.

That cheered Wall Street investors. The Dow Jones industrial average gained 40 points in morning trading.

Many analysts predict the economy slowed in the first three months of this year after logging a big growth spurt at the end of 2009.

The economy will expand at only a 2.5 percent to 3 percent pace in the first quarter of this year, analysts predict. That’s roughly half the 5.6 percent pace seen in the final quarter of last year.

In normal times, growth in the 3 percent range would be considered respectable. But the nation is emerging from the worst recession since the 1930s. Sizzling growth in the 5 percent range would be needed for an entire year to drive down the unemployment rate, now 9.7 percent, by just 1 percentage point.

Unlike past recoveries, where consumer spending led the way, this one is hinging more on the spending of businesses and foreigners.

High unemployment, sluggish wage gains, hard-to-get credit and record-high home foreclosures are all expected to prevent consumers from going on a spending spree — one of the main reasons why the pace of the recovery will be more subdued than in the past.

With spending outpacing income growth, Americans’ savings dipped in February.

Americans saved 3.1 percent of their disposable income, down from 3.4 percent in January. It was the lowest reading on the savings rate since October 2008.

Consumers increased their spending on “nondurable” goods, such as food and clothing, by 0.7 percent in February. That was down from a 1.7 percent increase in January. They boosted spending on services by 0.3 percent, up from a 0.2 percent rise in January. But they cut spending on “durable” goods, such as cars and appliances, by 0.4 percent, not as deep as the 1.4 percent cut in January.

Consumer spending accounts for the single-biggest slice of overall economic activity. That’s why it is so closely watched by investors and economists.

So far in the current quarter, consumer spending is shaping up to be better than it was at the end of last year.

For the entire January-to-March quarter, analysts think consumer spending come clock in at a pace of around 3 percent. That would mark an improvement from the 1.6 percent growth rate logged in the final quarter of last year.

Analysts are growing more confident that consumers will keep spending sufficiently into the coming months as the job market heals.

Economists predict that employers added around 190,000 jobs in March, in what they hope will be the start of consistent payroll gains. If they are right, it would mark the biggest jobs gain in three years. The unemployment rate is expected to stay at 9.7 percent for the third straight month.

The expected turnaround in job-creation would be welcome, but many economists say it will take at least until the middle of this decade for the situation to get back to normal, meaning a jobless rate of 5.5 percent. And, it will also take years for the economy to recover the 8.4 milion jobs wiped out by the recession.