Americans Spend Big in March as Winter Gloom Lifts

Consumer Spending
Julie Jacobson/AP
By Lucia Mutikani

WASHINGTON -- U.S. consumer spending recorded its largest increase in more than four and a half years in March, cementing views the economy ended a dismal first-quarter on solid footing.

The growth picture also was brightened by data Thursday showing factory activity accelerated for a third straight month in April.

The Commerce Department said consumer spending increased 0.9 percent after rising by 0.5 percent in February. March's gain was the biggest since August 2009 and beat economists' expectations for a 0.6 percent rise.

Consumer spending accounts for more than two-thirds of U.S. economic activity.

In a separate report, the Institute for Supply Management said its index of national factory activity rose to 54.9 last month, up from 53.7 in March. It was the best reading since December and reflected a pick-up in manufacturing jobs. New orders, however, were unchanged.

The upbeat reports added to data such as employment and industrial production in suggesting there was momentum in the economy at the tail end of a difficult first quarter, providing a springboard for faster growth in the April-June period.

"It reinforces our expectation for a 3.5 percent or better second-quarter growth performance," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The economy grew at an annual rate of only 0.1 percent in the first three months of the year. Economists and Federal Reserve officials, however, pinned the slowdown on the impact of a brutal winter. A moderation in the pace of restocking by businesses, which is likely temporary, also weighed on growth.

While another report from the Labor Department showed an unexpected rise in the number of Americans filing for unemployment benefits last week, the overall trend in initial claims continued to point to improving labor market conditions.

Initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 344,000. Economists had forecast first-time applications for jobless benefits falling to 319,000.

Claims are volatile around this time of the year because the timing of the Easter and Passover holidays and school spring breaks makes it difficult to adjust for seasonal fluctuations.

The four-week moving average for new claims, considered a better measure of underlying labor market conditions because it irons out week-to-week volatility, rose only 3,000 to 320,000.

"The broader labor market picture has not changed materially as of late and we are expecting another firm employment print in April," said Bricklin Dwyer, an economist at BNP Paribas in New York.

The government is expected to report Friday that nonfarm payrolls increased by 210,000 last month after rising by 192,000 in March, according to a Reuters survey of economists.

The unemployment rate is forecast falling one-tenth of a percentage point to 6.6 percent.

Broad Rise in Spending

In March, consumer spending was buoyed by a 1.4 percent surge in goods purchases. Spending on durable goods rose 2.7 percent, the largest increase since March 2010. Spending on services also increased by a solid 0.7 percent, reflecting increased demand for utilities and health care services.

When adjusted for inflation, consumer spending increased 0.7 percent in March after advancing 0.4 percent in February. March's increase in so-called real consumer spending was also the largest since August 2009.

%VIRTUAL-article-sponsoredlinks%Income increased 0.5 percent in March, the biggest gain since August 2013, after rising 0.4 percent in February.

Income continues to be supported by government subsidies for health care payments. Income at the disposal of households after adjusting for inflation and taxes rose 0.3 percent after rising by the same amount in February.

With spending outpacing income growth, the saving rate, which is the percentage of disposable income households are socking away, fell to 3.8 percent in March from 4.2 percent in February.

The March saving rate was the smallest since January 2013.

Despite the rise in consumer spending, inflation remained benign in March.

A price index for consumer spending rose 0.2 percent after edging up 0.1 in February. It was up 1.1 percent from a year ago in March, compared to a 0.9 percent year-on-year advance in February.

Excluding food and energy, prices also rose 0.2 percent after gaining 0.1 percent in February. They were up 1.2 percent from a year ago in March, compared to a 1.1 percent year-on-year rise in February.

Both measures remain stuck well below the Fed's 2 percent inflation target, giving the central bank room to keep benchmark interest rates near zero for a while. The Fed plans to wrap up a bond-buying program later this year, but it is not expected to move rates higher until sometime in 2015.

-Additional reporting by Ryan Vlastelica.

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