Spending by U.S. consumers cooled in March after the strongest gain in five months, showing the biggest part of the economy lost momentum as the first quarter drew to a close.
Purchases advanced 0.2 percent, more than projected and reflecting a surge in outlays for utilities and other services that is unlikely to be repeated, after a 0.7 percent increase the prior month, Commerce Department figures showed. Another report showed more Americans than forecast signed contracts to purchase previously owned homes in March.
Higher payroll taxes that took effect in January may be starting to take a bigger toll on the American worker, chipping away at the consumer spending that accounts for about 70 percent of the economy. With growth projected to ease this quarter and inflation subdued, Federal Reserve policy makers meeting this week will probably keep pursuing the record monetary stimulus that’s helped breathe life into the housing recovery.
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“Consumers won’t be able to sustain the current pace if income growth continues to disappoint,” said Millan Mulraine, an economist for TD Securities USA LLC in New York, who accurately projected the gain in spending. “The weak inflation backdrop is likely to cause the Fed to at least keep purchasing” securities.
The National Association of Realtors today said its index of pending existing-home sales increased 1.5 percent in March after a revised 1 percent decline that was larger than first reported.
Historically low mortgage rates and improvement in the labor market are helping power the housing market. A pickup in property values may prompt more Americans to put their homes on the market and help alleviate a limited supply of available dwellings as the spring selling season begins.
Stocks climbed after the figures and amid optimism central banks will maintain stimulus plans, with the Standard & Poor’s 500 Index advancing to a record. The S&P 500 rose 0.7 percent to 1,593.61 at the close in New York.
Elsewhere, economic confidence in the euro area decreased more than economists forecast in April as the 17-nation currency bloc struggled to emerge from a recession and the bailout of Cyprus renewed debt-crisis concerns.
An index of executive and consumer sentiment dropped to 88.6 from a revised 90.1 in March, the European Commission in Brussels said today. That’s the lowest since December.
The Commerce Department’s report showed Americans’ incomes increased 0.2 percent in March after climbing 1.1 percent the prior month. The Bloomberg survey median called for a 0.4 percent gain. Wages and salaries rose 0.2 percent after climbing 0.7 percent. Disposable income, or the money left over after taxes, rose 0.3 percent after adjusting for inflation. It advanced 0.7 percent in the prior month.
The lagged effect from a two percentage-point jump in the payroll tax at the start of 2013, and $85 billion in automatic budget cuts that began March 1, mean economic growth will weaken to a 1.5 percent pace this quarter from 2.5 percent, according to a Bloomberg survey taken April 5 to April 9. The economy will then accelerate to an average 2.4 percent rate in the last six months of the year, economists in the survey predicted.
Some retailers are seeing little progress in sales. At Safeway Inc. (SWY), the second-largest U.S. supermarket chain, customers remain price-conscious, in part because confidence is yet to rebound to pre-recession levels, Chairman and Chief Executive Officer Steve Burd said.
Shoppers are “trying to be very careful with how they spend their dollars,” Burd said on an April 25 earnings call.
The median estimate in a Bloomberg survey of 74 economists called for little change in March personal spending. Projections ranged from a 0.2 percent drop to gains of 0.4 percent.
An index of inflation tied to spending patterns increased 1 percent from a year earlier, the smallest gain since October 2009.
Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.3 percent for a second month, today’s report showed.
Price-adjusted spending on services jumped 0.6 percent, the most since October 2001. The increase probably reflects outlays on utilities, reflecting colder-than-normal temperatures. The average temperature last month was 40.8 degrees Fahrenheit (4.9 degrees Celsius), making it the coolest March since 2002, according to the National Climatic Data Center.
“With the unusually cold weather that drove elevated heating demand in the past two months continuing and now prompting less of a need to switch to air conditioning moving through the spring, utilities consumption will likely pull back substantially” this quarter, Ted Wieseman, an economist at Morgan Stanley said in a research note.
The economy grew at a 2.5 percent annualized rate in the first quarter, less than the median forecast of economists surveyed by Bloomberg, limited by a drop in defense outlays. Consumer spending gained 3.2 percent, the most since the fourth quarter of 2010.
Fed policy makers, who begin a two-day meeting tomorrow, have said they will maintain stimulus until the outlook for the labor market improves “significantly.” The central bank’s strategy is helping make it cheaper to finance home purchases.
The average rate for a 30-year fixed mortgage was 3.40 percent in the week ended April 25, close to the all-time low of 3.31 percent that was reached in November, according to Freddie Mac.
“Companywide, our sales and traffic have been strong,” Robert Schottenstein, president and chief executive officer of Columbus, Ohio-based builder M/I Homes Inc., said during an April 25 earnings conference.
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“The quality of traffic is also improving, with buyers having both a greater sense of optimism as well as a greater sense of urgency, no doubt fueled by the historically low interest rates, limited inventory both new and used and the fact that we’re also seeing rising prices in many markets and submarkets,” he said.
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