Hibernating Consumers Cast Pall on U.S. Economic Growth

AUCKLAND - SEP 2014:Man hand out credit card.Credit cards are the most profitable sector of the American banking industry, with
By Lucia Mutikani

WASHINGTON -- U.S. consumer spending unexpectedly stalled in April as households cut back on purchases of automobiles and continued to boost savings, suggesting the economy was struggling to gain momentum early in the second quarter.

But there are signs a rebound from the first-quarter's slump is under way, with other reports on Monday showing manufacturing activity picked up in May for the first time in seven months and construction spending surged in April to a near 6½-year high.

%VIRTUAL-pullquote-The construction and manufacturing data cast a bit of sunshine on an otherwise cloudy day for economic data.%Still, soft consumer spending and muted inflation pressures, after a price index for consumer spending in April recorded its smallest gain since late 2009 on an annual basis, suggest the Federal Reserve probably won't raise interest rates before the end of the year.

"The construction and manufacturing data cast a bit of sunshine on an otherwise cloudy day for economic data. We need to see more of a rebound in growth before the Fed pulls the trigger on interest rates," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

The Commerce Department said April's flat reading in consumer spending followed a 0.5 percent increase in March.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was also curbed by weak demand for utilities as temperatures warmed up. It had been forecast rising 0.2 percent.

In a separate report, the Institute for Supply Management said its national factory activity index rose to 52.8 last month from 51.5 in April.

The index had been declining since November as manufacturing battled a strong dollar and deep spending cuts in the energy sector in response to a plunge in crude oil prices. A reading above 50 indicates expansion in the manufacturing sector, which accounts for about 12 percent of the U.S. economy.

The index, which was also restrained by labor disruptions at the West Coast ports, was last month boosted by a surge in new orders and factory employment.

Fourteen out of 18 industries reported growth last month, including electrical equipment, appliances and components; primary metals, machinery and transportation equipment.

Another survey from financial data firm Markit showed factory activity improved toward the end of May.

"After transitory weakness in the first quarter, the manufacturing outlook has improved. But the dollar and lower oil prices continue to be a drag on some select industries," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.

The dollar firmed against a basket of currencies, while prices for U.S. government debt fell. U.S. stocks were modestly higher.

Sturdy Construction

Gross domestic product contracted at a 0.7 percent annual rate in the first three months of the year.

But given that a confluence of temporary factors conspired to depress the output figure, including a problem with the model the government uses to smooth seasonal fluctuations, the decline in GDP likely overstates the economy's weakness.

In a second report the Commerce Department said construction spending jumped 2.2 percent to an annual rate of $1 trillion, the highest level since November 2008. The percent increase was the largest since May 2012 and reflected broad gains in both private and public outlays.

Forecasting firm Macroeconomic Advisers raised its second-quarter GDP growth estimate by four-tenths of a percentage point to a 2 percent rate on the construction report.

Morgan Stanley (MS) lifted its estimate to a 2.1 percent rate from a 1.6 percent pace, while Goldman Sachs (GS) bumped up its estimate by 0.1 percentage point to a 2.5 percent rate.

The manufacturing and construction reports added to business spending plans, employment and housing data in suggesting some momentum in the economy even as consumer spending and industrial production have been soft.

The weakness in consumer spending is puzzling given that wages are rising and households accumulated hefty savings from cheaper gasoline.

"Most likely, Americans are using their pump price savings to pay down debt, increase the money they put aside and for dining out," said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts.

In April, personal income rose a solid 0.4 percent and the saving rate increased to 5.6 percent from 5.2 percent in March.

With consumption soft, inflation pushed further below the Fed's 2 percent target.

The personal consumption expenditures price index edged up 0.1 percent in the 12 months to April, the smallest gain since October 2009, after rising 0.3 percent in March.

Excluding food and energy, the core PCE price index increased 1.2 percent from a year ago after being up 1.3 percent in March.

The PCE price indices are the Fed's preferred inflation measures. The soft readings are in sharp contrast with April's consumer price index report published in May, which showed a pick-up in inflation over the last couple of months.

The differences reflect medical care prices, which are treated differently in both reports.

9 Numbers That'll Tell You How the Economy's Really Doing
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Hibernating Consumers Cast Pall on U.S. Economic Growth
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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