Monday, April 5, 2010

Consumer spending up, savings rate hits 18-month low

(WASHINGTON) US consumer spending rose in March for a sixth straight month as households pushed savings to a 11/2-year low, further evidence consumers were starting to take a bigger role in the manufacturing-led recovery.

The Commerce Department said yesterday that spending rose 0.6 per cent after rising by an upwardly revised 0.5 per cent in February, previously reported as a 0.3 per cent gain.

Paul Dales, an economist at Capital Economics, said the big decline in the savings rate was 'disconcerting' because it called into question the durability of the current rebound in consumer spending.

'Households are finally starting to contribute in earnest to the economic recovery, but in the main, this is being financed through a rundown in savings rather than a surge in incomes,' he wrote in a research note.

'We are concerned that . . . the consumer recovery will be short-lived rather than long-lasting,' he added.

The data was reflected in the first-quarter gross domestic product report that was published on Friday.

Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of US economic activity, to increase 0.6 per cent in March.

'Consumer spending is recovering and in a broader context, the leadership in the recovery is transferring to the consumers from corporations even with a depressed job market,' said Guy Lebas, fixed income strategist at Janney Montgomery Scott in Philadelphia.

During the housing boom of the last decade, the annual savings rate had fallen as low as 1.7 per cent in 2007. Consumers felt more wealthy as their home values soared and therefore felt less of a need to save.

However, after housing sales and prices collapsed, helping to send the country into a deep recession, Americans began saving more. The savings rate rose to 4.3 per cent in 2009, the highest level in a decade.

The government reported on Friday that the broadest measure of economic activity, the gross domestic product, grew at an annual rate of 3.2 per cent in the January-March period.

That marked the third quarterly increase since last summer.

Most economists believe the recession, which began in December 2007, probably ended in either June or July last year.

The healthy first quarter GDP gain was driven by a big rebound in consumer spending, which powered ahead at an annual rate of 3.6 per cent, the best showing in three years.

But economists said spending gains of that size cannot be maintained without greater income growth. -- Reuters, AP

Source: Business Times, 4 May 2010

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