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Consumer spending, income post gains

March 30th, 2007 9:30 pm by Associated Press



WASHINGTON - Consumers' spending and income showed bigger-than-expected gains in February, and construction posted the first increase in nearly a year, hopeful signs that the economic slowdown will not worsen.


The Commerce Department reported Friday that consumer spending, bolstered by strong income gains, was up 0.6 percent last month, while consumer income rose a similar 0.6 percent. Both figures were double what analysts had expected.


Separately, the department said construction spending rose by 0.3 percent last month, the first increase in 11 months, since a 1 percent jump in March 2006.


Since then, construction has either fallen or been flat each month as the industry was jolted by a sharp slowdown in housing activity.


For February, strong gains in construction of hotels, shopping centers and state and local government projects offset the 11th consecutive decline in residential construction.


Analysts, who had been forecasting another drop in the overall construction figure, said the February performance was good news, especially in light of February's colder-than-normal weather, which had been expected to hold back activity.


The strength in consumer spending and construction helped to alleviate fears that the country could be headed into a recession. Those worries were elevated by a string of weaker-than-expected reports in recent weeks and by turmoil in financial markets, including a 416-point drop in the Dow Jones industrial average on Feb. 27.


Wall Street ended the day Friday up 5.60 points at 12,354.35. For the quarter, the Dow was down about 0.8 percent, suffering its first losing quarter since falling by more than 2 percent in the second quarter of 2005.


Analysts cautioned that they still believe the economy has slowed further in the January-March period, continuing a yearlong trend of lackluster growth as the country was battered first by soaring energy prices, followed by a slumping home market and troubles in auto manufacturing. Stephen Stanley, chief economist at RBS Greenwich Capital, said he believed the economy grew at a weak 2.1 percent annual rate in the January-March period, down from a lackluster 2.5 percent rate in the final three months of 2006.


Analysts noted that much of the strength in consumer spending last month reflected greater spending on energy, which reflected higher costs and increased demand because of the colder weather.


After adjusting for price increases, consumer spending rose by a much more sedate 0.2 percent in February.


Ian Shepherdson, chief economist at High Frequency Economics, a private consulting firm, said consumer spending likely slowed to a 3.25 percent growth rate in the January-March quarter, down from a 4.2 percent rate of increase in the final three months of last year. Consumer spending is watched closely because it accounts for two-thirds of total economic activity.


The spending report showed a worrisome increase in inflation, which shot up by 0.3 percent in February, the biggest increase since a similar rise last August. That left core inflation rising by 2.4 percent over the past 12 months, significantly higher than the Federal Reserve's 1 percent to 2 percent comfort zone. The year-over-year increase has not been exceeded since a 2.5 percent jump in April 1995. "The news on inflation was not comforting," said Nigel Gault, an economist at Global Insight, a private forecasting firm. "So despite poor recent news on the housing market and business investment spending, the Fed cannot yet contemplate cutting interest rates." Fed Chairman Ben Bernanke told Congress on Wednesday that inflation remained the central bank's main concern but that risks to economic growth had also risen. Bernanke's testimony dashed hopes in financial markets that the central bank, which has kept interest rates unchanged since last June, might soon move to cut rates in an effort to bolster a faltering economy. Even with February's rise in incomes, the savings rate remained in negative territory for the 23rd consecutive month, unchanged from January at a minus 1.2 percent. This means consumers spent all they earned in February and dipped into savings and increased borrowing to finance purchases during the month. --- On the Net: Consumer spending and incomes: http://www.bea.gov/rels.htm Construction spending: http://www.census.gov/constructionspending AP-CS-03-30-07 1748EDT

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