Spending Rises Less Than Forecast as Americans Boost Savings

  • March spending gain wraps up weakest quarter in a year
  • Inflation gauge preferred by Federal Reserve rose 0.8% YoY

Consumer spending rose less than forecast in March, wrapping up the weakest quarter in a year for the biggest part of the U.S. economy even as incomes accelerated.

Purchases picked up 0.1 percent after a revised 0.2 percent gain in February, Commerce Department figures showed Friday. The median forecast in a Bloomberg survey called for a 0.2 percent advance. Incomes increased 0.4 percent, matching January as the biggest gain since June.

A tempering of household purchases for the last three quarters has surprised economists given the favorable backdrop of low inflation, job gains and cheap borrowing costs. Faster wage growth may be needed to help encourage American consumers to spend more freely and jump start an economy coming off its weakest performance in two years.

“Consumption ended the quarter on a very soft footing,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, who correctly projected the gain in spending. “It’s a weak hand-off to the second quarter. There’s nothing in this report to suggest a strong imminent pickup in spending” and “the inflation story is also benign.”

Projections for March spending ranged from unchanged to a gain of 0.4 percent. The previous month’s reading was initially reported as a 0.1 percent increase.

The Bloomberg survey median called for incomes to rise 0.3 percent. February was revised to a 0.1 percent gain from a previously reported 0.2 percent advance.

Disposable income, or money left over after taxes, increased 0.3 percent in March from the prior month after adjusting for inflation following a 0.2 percent gain in February.

The saving rate rose to 5.4 percent last month, the highest in more than a year. At $735.5 billion, the level of savings was the highest since December 2012.

In the first quarter, real disposable income rose at a 2.9 percent annualized rate after a 2.3 percent pace in the final three months of 2015. In January through March of 2015, it was running at a 3.9 percent clip.

Wages and salaries climbed at a 3.9 percent pace in the first quarter, the slowest pace in a year.

Inflation Signs

The report showed the price index tied to consumer spending increased 0.1 percent last month after falling 0.1 percent in February. From a year earlier, the gauge was up 0.8 percent. This inflation measure is preferred by Federal Reserve policy makers and it hasn’t met their target since April 2012.

Stripping out the volatile food and energy components, the price measure also rose 0.1 percent from the month before and 1.6 percent in the 12 months ended March.

With the one component of the Fed’s dual mandate -- employment -- on solid ground, signs that inflation is gradually accelerating toward the bank’s goal would be welcome. Such a development would provide some ammunition for members of the Federal Open Market Committee who’d like the central bank normalize interest rates sooner rather than later.

“Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” the FOMC said in an April 27 statement.

Car Buying

After adjusting for inflation, which generates the figures used to calculate gross domestic product, purchases were little changed last month after a 0.3 percent gain in February. Spending in March was held back by less demand for motor vehicles, according to the Commerce Department.

Purchases of durable goods, including automobiles, decreased 0.3 percent last month after adjusting for inflation, compared with a 0.4 percent gain in February. Outlays for non-durable goods, which include gasoline, rose 0.7 percent in March. Spending on services fell 0.1 percent.

The GDP report published Thursday showed the economy expanded from January through March at the slowest pace in two years as companies and consumers alike tightened their belts. GDP rose at a 0.5 percent annualized rate after a 1.4 percent advance in the fourth quarter.

Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.

— With assistance by Chris Middleton

(Adds economist comment in the fourth paragraph.)
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