Spending Pauses as Households Save More

U.S. Economy: Spending Pauses as Households Save More (Update1)

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By Timothy R. Homan and Shobhana Chandra

May 28 (Bloomberg) -- Consumer spending paused in Aprilafter growing in the first quarter at the fastest pace in threeyears as Americans used gains in wages to rebuild savings.

Purchases were little changed last month after climbing 0.6percent in March, indicating an early Easter holiday may havepushed demand into the prior month at the expense of April,according to figures from the Commerce Department today inWashington. Other reports showed households gained confidence inMay and businesses expanded for the eighth consecutive month.

More jobs mean households will be less dependent ongovernment help to maintain spending, which accounts for about70 percent of the economy. Profits at retailers including TargetCorp. are beating estimates, and General Electric Co. is amongcompanies saying the global economic rebound is strong enough towithstand the turmoil in financial markets.

“We are looking at fairly decent gains in consumerspending in the second quarter,” said Conrad DeQuadros, asenior economist at RDQ Economics in New York. “There is apickup in income growth which is reflective of the improvedlabor-market picture. That’s what’s required to sustain thismoderate pace of spending.”

Stocks fell, trimming this week’s gain. The Standard &Poor’s 500 Index fell 1.2 percent to close at 1,089.41 in NewYork. Treasury securities rose, pushing the yield on thebenchmark 10-year note down to 3.29 percent from 3.36 percentlate yesterday.

Gain Projected

The median forecast of 77 economists surveyed by BloombergNews projected a 0.3 percent gain in spending. Estimates rangedfrom a decline of 0.1 percent to a 0.6 percent increase.

Incomes rose 0.4 percent in April for a second month,matching the survey median. Wages and salaries rose 0.4 percentlast month after climbing 0.3 percent in March.

The savings rate climbed to 3.6 percent last month, thehighest level since January, from 3.1 percent in March asincomes increased and purchases cooled.

Consumer sentiment improved in May, a report from ThomsonReuters/University of Michigan showed. The group’s confidenceindex rose to 73.6 from 72.2 in April. The final number exceededa preliminary reading of 73.3 issued earlier this month,indicating the slump in stocks hasn’t unnerved households.

“Important fundamentals, like resumption of job growth andrising wealth, are helping consumers get back in the game,”said Richard DeKaser, chief economist at Woodley Park Researchin Washington, who had forecast the May index to rise to 73.8.

Continued Expansion

The Institute for Supply Management-Chicago Inc. said todayits business barometer fell to 59.7 this month from 63.8 inApril, which was the highest level in five years. Figuresgreater than 50 signal expansion.

“Clearly the factory sector continues to move ahead at avery healthy clip though it’s slowed somewhat from the torridApril pace,” said DeKaser, who correctly forecast the decline.“We’re coming down to a more sustainable pace.”

Rising sales and lean inventories are prompting companiesto increase production and hiring, helping to broaden theeconomic recovery beyond manufacturing.

Profits at retailers from Target to Gap Inc. are beatingestimates as employment picks up. Employers have increasedpayrolls in five of the past six months, culminating in a290,000 gain in April that was the biggest gain in four years,according to figures from the Labor Department.

More Jobs

Payrolls probably increased again this month, and theunemployment rate likely fell to 9.8 percent, according to themedian estimates of economists surveyed before a LaborDepartment report due June 4.

“Because employment is growing, we’re starting to createsome labor income and that is positive for future consumerspending,” said Nigel Gault, chief U.S. economist at IHS GlobalInsight in Lexington, Massachusetts, who projected spendingwould pause.

The economy grew at a 3 percent annual rate in the firstquarter, after expanding at a 5.6 percent pace in the last threemonths of 2009, figures from the Commerce Department showedyesterday. Consumer spending accelerated to a 3.5 percent pace,the best performance since the first three months of 2007.

Target, the second-largest U.S. discount retailer, thismonth said it posted first-quarter earnings that beat analysts’projections. Chief Executive Officer Gregg Steinhafel cited abetter-than-expected economic environment that boosted sales ofprofitable items such as clothes.

General Electric Chief Executive Officer Jeffrey Immeltsaid May 24 that Europe’s debt troubles can be fixed and they’renot enough to slow a global economic recovery.

“In Europe, I think this is going to be solvable; it’sgoing to mean slow growth,” for the region, Immelt said afterhis commencement address at Boston College. “I don’t think it’senough to slow the recovery, I really don’t.” He also said theU.S. economy is “very good and improving.”