Consumer spending up, inflation pressures muted

By Lucia Mutikani

WASHINGTON (Reuters) - Consumer spending rose in March but the increase was largely a result of higher outlays for utilities due to cool weather, leaving expectations of slower second-quarter economic growth intact.

The Commerce Department said on Monday consumer spending advanced 0.2 percent last month after an unrevised 0.7 percent increase in February. While spending on services, mostly utilities increased, outlays on goods fell.

Consumer spending accounts for about 70 percent of U.S. economic activity and the increase last month provided a higher base for second-quarter consumer spending. Economists had expected a flat reading last month.

"But much of the upside in March was in a second straight enormous gain in utilities consumption, which appears likely to see a substantial reversal in coming months," said Ted Wieseman, an economist at Morgan Stanley in New York.

The report also showed inflation remained muted. After adjusting for price changes, spending increased 0.3 percent after advancing by the same margin in February.

Details of the report were largely included in Friday's first-quarter gross domestic product report. The dollar slipped after the report, while U.S. Treasury debt prices rose.

"The report was generally consistent with our view that the economy lost momentum at the end of the first quarter," said Daniel Silver, an economist at JPMorgan in New York.

A separate report showed contracts to buy previously owned homes rose last month to their highest level since April 2010, showing underlying strength in the housing market recovery, even though the pace of sales growth has cooled in recent months.

The National Association of Realtors said its Pending Sales Index, based on contracts signed in March, rose 1.5 percent to 105.7.

Housing remains the bright spot in the economy, which appears to have hit a soft patch in recent weeks, with data ranging from retail sales to employment and factory activity significantly weakening in March.

The economy grew at a 2.5 percent rate in the first quarter, accelerating from a 0.4 percent rate in the last three months of 2012. Growth estimates for the second quarter are currently in a 1.0 to 1.5 percent range.

But some economists believe the better-than-expected reading in consumer spending in March, as well as cooling inflation, increased the chances of a better GDP number in the second quarter than currently being expected.

"This makes it much more likely than we thought for real consumer spending to post a solid gain in the second quarter and increases the chances that real GDP growth in the second quarter will come in above 2 percent," said John Ryding, chief economist at RDQ Economics in New York.

Consumer spending grew at a brisk 3.2 percent rate in the first three months of the year.

LITTLE INFLATION

Last month, income rose 0.2 percent after a 1.1 percent increase in February. Income growth is being restrained by the end of a 2 percent payroll tax cut on January 1.

But subsiding inflation pressures are helping to support households' purchasing power. Income at the disposal of households after inflation and taxes increased 0.3 percent last month after a 0.7 percent gain in the prior month.

With income growth matching spending, the saving rate - the percentage of disposable income households are socking away - was unchanged at 2.7 percent.

The report showed little inflation, with a price index for consumer spending dipping 0.1 percent, the first drop since November. A core reading that strips out food and energy costs was flat.

Over the past 12 months, inflation has risen just 1.0 percent, the smallest gain since October 2009 and a slowdown from the 1.3 percent logged in the period through February.

Core prices are up 1.1 percent, the smallest rise since March 2011 and well below the Federal Reserve's 2 percent target. Core PCE had increased 1.3 percent in February.

The lack of inflation pressure gives the U.S. central bank scope to maintain its very easy monetary policy stance.

"People are going to pick up how low inflation is and how low it's going. That's what the Fed will be keeping an eye on given the weak demand environment," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Fed officials meet this week to assess the health of the economy. The Fed is widely expected to keep purchasing bonds at a pace of $85 billion a month.

(Additional reporting by Margaret Chadbourn in Washington and Richard Leong in New York; Editing by Andrea Ricci)

Source: http://news.yahoo.com/consumer-spending-inflation-pressures-muted-124605766.html

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