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U.S. Economy: Spending Cools as Food, Fuel Prices Climb

Consumer Spending in U.S. Rose Less Than Forecast
Target projected sales at stores open at least a year may rise as much as 5 percent this year. Photographer: Tom Starkweather/Bloomberg

Consumer spending cooled more than forecast in January as rising food and fuel prices caused Americans to cut back on post-holiday visits to malls and restaurants.

Purchases rose 0.2 percent, the smallest gain since June, as winter storms may have also discouraged shoppers, according to figures from the Commerce Department today in Washington. A report from Chicago-area purchasing managers showed businesses expanded in February at the fastest pace in two decades.

Economists at Morgan Stanley and Deutsche Bank Securities Inc. cut forecasts as the data showed households may have used some of the extra cash from the payroll tax cuts to boost savings. At the same time, the world’s largest economy is getting a lift from manufacturers like Deere & Co. as business investment in new equipment accelerates and exports climb.

“The consumer has become slightly more cautious,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly projected the gain in purchases. “The extra money for gas prices is coming out of consumers’ pocket. Spending will be positive, but modest.”

Stocks advanced, extending a third consecutive monthly gain, after billionaire investor Warren Buffett said he’s looking to make more acquisitions. The Standard & Poor’s 500 Index rose 0.6 percent to 1,327.22 at the 4 p.m. close in New York. The S&P Retailing Supercomposite advanced 0.1 percent.

Less Than Forecast

The median estimate of 71 economists surveyed by Bloomberg News called for a 0.4 percent advance in spending. Projections ranged from increases of 0.2 percent to 0.5 percent. The Commerce Department revised the December spending figure down to 0.5 percent from a previously reported 0.7 percent gain.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. Figures greater than 50 signal expansion. The gauge, which was projected to fall, exceeded every estimate of economists surveyed by Bloomberg News.

“Manufacturing has at least several more months of very rapid growth in front of it,” said Robert Stein, a senior economist at First Trust Portfolios in Wheaton, Illinois, who forecast the gauge would rise to 70.3. Businesses “are just going to see a lot of demand for the kind of stuff you put on shelves” because inventories are lean, he said.

Tax Cuts

The spending report showed incomes climbed 1 percent in January, exceeding the median forecast of economists surveyed and the most since May 2009. The jump reflected the tax-cut compromise reached by President Barack Obama and Congressional Republicans in December that reduced the social security payroll tax by 2 percentage points this year.

Disposable incomes, or the money left after taxes, rose 0.7 percent in January, the most since April. Excluding the benefits of the tax changes, the increase would have been 0.1 percent, the Commerce Department said.

The savings rate increased to 5.8 percent from 5.4 percent in December. It has been dropping since reaching a 2010 high of 6.3 percent in June as households started gaining confidence to spend.

Today’s report also showed inflation stabilized. The gauge tied to spending patterns increased 1.2 percent from January 2010, the same as in the 12 months to December.

The Federal Reserve’s preferred price measure, which excludes food and fuel, rose 0.1 percent from the prior month and was up 0.8 percent from a year earlier, matching December’s year-over-year gain.

Adjusted for Prices

Adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending fell 0.1 percent in January, the first decline in a year.

Restaurants were among the categories taking the biggest hit in sales last month, indicating bad weather may have also played a role. Winter storms spread from the Midwest and the South to New England, covering 71 percent of the country with snow on Jan. 12, according to the National Climatic Data Center.

Fed policy makers are awaiting further proof of a durable pickup in the labor market that will spur growth, one reason why they plan to complete a second round of monetary stimulus worth $600 billion by June. Fed Chairman Ben S. Bernanke in testimony before Congress over the next two days may reiterate that he is dissatisfied with the pace of expansion and the amount of time it’s taking to bring down unemployment.

Last Quarter

The economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated, as state and local governments made deeper cuts in spending, Commerce Department figures showed on Feb. 25. Consumer purchases rose at a 4.1 percent pace, the most since the same three months in 2006, compared with a 4.4 percent rate originally estimated.

Economists at Morgan Stanley in New York cut their tracking estimate for consumer spending this quarter to 1.9 percent from a prior estimate of 2.4 percent. Deutsche Bank’s Joe LaVorgna reduced it by a percentage point to 2.5 percent.

The slowdown in household purchases indicates the expansion will become more dependent on gains in factory production as housing hovers near depressed levels.

Another report today showed the index of pending home resales fell 2.8 percent after a revised 3.2 percent decrease the prior month that was initially reported as a gain, according to figures from the National Association of Realtors.

Deere, the world’s largest farm-equipment maker, this month raised its full-year profit forecast and reported first-quarter profit that beat analysts’ estimates as higher crop prices boosted North American sales of tractors and combines.

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