Americans Spend Big in January

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Consumer Spending in U.S. Climbed More Than Forecast in January
Mark Lennihan/AP
By Shobhana Chandra

Consumer spending in the U.S. climbed more than forecast in January, reflecting the biggest increase in services in over 12 years as Americans began to enroll for the Obama administration's health care program.

Household purchases, which account for about 70 percent of the economy, rose 0.4 percent, after a 0.1 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed Monday in Washington. The median forecast of 76 economists in a Bloomberg survey called for a 0.1 percent rise. Incomes advanced 0.3 percent.

Outlays on services were boosted by $29 billion at an annual rate in January based on estimates of Medicaid benefits and enrollments in the Affordable Care Act insurance exchanges, the Commerce Department said. Improvement in hiring and rising wealth underpinned by housing and stock market gains will keep providing consumers with the means to spend on a broader swathe of goods and services that will boost economic growth.

"Consumer spending had OK momentum" in January, Brian Jones, senior U.S. economist at Societe Generale in New York, said before the report. "We expect to see better job growth in the spring. More people with jobs means more money to spend."

Stock index futures held earlier losses after the report. The contract on the Standard & Poor's 500 index (^GPSC) maturing in March dropped 0.8 percent to 1,843.5 at 9:14 a.m. in New York as Russia's threat to invade Ukraine sent investors searching for safer havens.

Survey Results

Projections for spending in the Bloomberg survey ranged from a 0.1 percent drop to a gain of 0.5 percent. The December reading was previously reported as an increase of 0.4 percent.

The Bloomberg survey median called for incomes to rise 0.2 percent.

Monday's figures showed that adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases rose 0.3 percent after a 0.1 percent decrease the previous month.

Spending on durable goods, including automobiles, decreased 0.2 percent after adjusting for inflation following a 2.2 percent drop in December. Purchases of non-durable goods, which include gasoline, declined 0.7 percent.

Household outlays on services advanced 0.8 percent after adjusting for inflation. Before eliminating the influence of prices, they climbed 0.9 percent, the biggest gain since October 2001. In addition to health care, the category also includes utilities, tourism, legal help and personal care items such as haircuts. This makes it typically difficult for the government to estimate accurately in the preliminary report.

Little Inflation

Monday's figures also showed the core price measure, which excludes food and fuel, rose 0.1 percent in January from the prior month and was up 1.1 percent from January 2013.

Retailers, coming off a tough holiday season marked by steep discounts, have been hard hit as winter storms disrupted shopping in January. With results in from 62 of 122 retail chains, the industry has posted its first drop in quarterly profit since the economic contraction that ended in 2009, according to Retail Metrics. Revenue also rose at the lowest rate since that year, the research firm found.

Businesses predicting a rebound include Target (TGT), which said sales have shown signs of improvement in February, and Macy's (M), which anticipated that spring would bring a sales recovery after frigid weather forced hundreds of store closings.

Housing Rebound

Home Depot (HD), the largest U.S. home-renovations chain, and Lowe's (LOW), the second-largest, expect continuing gains in demand spurred by the real-estate rebound.

"Some of the recent housing and jobs data has softened a little bit, but we still think the consumer is going to be there and 2014 is going to be a great year," Robert Niblock, chief executive officer of Lowe's, said in an interview last week.

Disposable income, or the money left over after taxes, %VIRTUAL-article-sponsoredlinks%rose 0.3 percent after adjusting for inflation. It dropped 0.2 percent in the prior month and was up 2.8 percent from January 2013.

The saving rate was 4.3 percent in January, unchanged from the prior month. Wages and salaries increased 0.2 percent after dropping 0.1 percent in December.

Household purchases toward the end of last year were less robust once the Commerce Department issued revisions Friday. Consumer spending climbed at a 2.6 percent annualized pace in the final three months of 2013, slower than the prior estimate though still the best performance since early 2012. Fourth-quarter gross domestic product grew at a 2.4 percent rate, also weaker than the prior estimate.

Fewer Cuts

Less fiscal restraint this year and further progress in the job market probably will boost GDP once the effect of unusually harsh weather dissipates.

Federal Reserve Chair Janet Yellen last week said the central bank is likely to keep trimming asset purchases, even as it monitors recent reports to "try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook."

Policy makers anticipate that "economic activity and employment will expand at a moderate pace this year," she said to the Senate Banking Committee on Thursday.

Payrolls climbed by 150,000 in January after a 113,000 gain a month earlier, according to the Bloomberg survey median ahead of Labor Department data due Friday. The jobless rate held at a five-year low of 6.6 percent, economists predicted.

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Americans Spend Big in January
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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