Consumer Spending Rises, Along With Gas Prices
Energy costs, inflation means consumers are earning less
March 28, 2011WASHINGTON (AP) -- Americans earned a little more and spent a little more in February, thanks to a tax cut. But a big part of the extra money went to cover higher gas prices.
Consumer spending jumped 0.7 percent last month and personal incomes rose 0.3 percent, the Commerce Department said. Both gains reflected a Social Security tax cut, which boosted take-home pay.
Still, high gas prices soaked up much of the spending increase. Once inflation was removed, the rise was a more moderate 0.3 percent.
After-tax incomes were also hampered by inflation. Once accounting for higher prices, incomes actually fell 0.1 percent.
Economists are concerned that if energy costs keep going up, that will leave consumers with less disposable income and that would lead to slower economic growth. Consumer spending accounts for 70 percent of economic growth.
Separately, the National Association of Realtors said more people signed contracts to purchase homes in February. But the gains weren't enough to signal a rebound in the housing market.
Higher gas prices and the persistently weak housing market are two of the biggest challenges facing an economy that is trying to gain momentum nearly two years after the recession officially ended.
Paul Dales, senior U.S. economist at Capital Economics, said the latest data on incomes and spending provided "yet more evidence that higher prices are denting economic growth."
Dales said it was likely that consumer spending will grow only 2 percent to 2.5 percent in the current January-March quarter. That would be down sharply from the 4 percent increase in consumer spending in the October-December period, the fastest pace in four years. Higher oil prices are threatening to sap that momentum this year.
In February, spending on durable goods rose 1.7 percent. Much of that strength came from the purchase of new cars. Still, spending on nondurable goods rose 1.5 percent, reflecting higher prices for gasoline.
The big rise in spending and smaller increase in incomes pushed the household saving rate down to 5.8 percent of after-tax incomes last month. That compared to 6.1 percent in January.
An inflation measure tied to consumer spending that is followed by the Federal Reserve rose 0.4 percent in February, the biggest one-month gain in nearly three years. But excluding food and energy, this inflation gauge was up a more moderate 0.2 percent. Over the past 12 months, core inflation, which excludes food and energy, is up a modest 0.9 percent.
Home sales picked up slightly in February, one month before the spring buying season officially began.
The National Association of Realtors says its index of sales agreements for homes rose 2.1 percent last month to a reading of 90.8. Signings rose in every region but the Northeast.
Still, the index is below 100, which is considered a healthy level. The last time it reached that point was in April, the final month people could qualify for a home-buying tax credit.
Contract signings are usually a good indicator of where the housing market is heading. That's because there's usually a one- to two-month lag between a sales contract and a completed deal.