By Bob Willis and Timothy R. Homan
(Updates with closing markets in fifth paragraph.)
April 29 (Bloomberg) -- Americans increased their spending in March as they paid more for gasoline and groceries, suggesting income gains may need to pick up to prevent a bigger squeeze on household finances.
Purchases rose 0.6 percent after a revised 0.9 percent gain the prior month that was higher than previously estimated, the Commerce Department said today in Washington. After adjusting for changes in prices, the spending that accounts for 70 percent of the economy rose 0.2 percent in March.
Workers are finding limited success asking for pay raises, a reason Federal Reserve policy makers will maintain record monetary stimulus after ending large-scale bond purchases in June. Another report showed business activity grew in April at a pace that?s consistent with steady expansion in manufacturing.
?A larger share of consumers? money must be allocated toward gasoline and food,? said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. ?Manufacturing is continuing to expand and looks healthier than other parts of the economy.?
Stocks gained as results at Caterpillar Inc. and Goodyear Tire & Rubber Co. beat estimates. The Standard & Poor?s 500 Index climbed 0.2 percent to 1,363.61 at the 4 p.m. close in New York.
?We expect that the pace of world economic growth will support continued recovery in the key industries we serve,? Doug Oberhelman, chairman and chief executive officer of Caterpillar, the world?s largest maker of construction equipment, said in a statement.
Business Barometer
The Institute for Supply Management-Chicago Inc. said today its business barometer dropped to 67.6 in April from 70.6 in March. Figures greater than 50 signal expansion, and the median forecast in a Bloomberg News survey of economists called for a decline to 68.2.
The business spending that helped lead the economy out of recession in mid-2009 has been helped this year in part by President Barack Obama?s December compromise with congressional Republicans on taxes. Companies will be able to depreciate 100 percent of investments in capital equipment in 2011.
The Commerce Department?s report showed Americans? disposable incomes, or the money left over after taxes, rose 0.1 percent after adjusting for inflation, following no change in February, a reminder of the challenge represented by rising food and energy costs. The savings rate held at 5.5 percent.
?Like a Tax?
?The higher food and energy prices function like a tax in the short term, and discretionary spending is going to bear the brunt of that,? said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. ?Anything that increases consumer income will increase consumer spending, be that more jobs or higher wages. We do expect the rebound in the labor market to continue.?
The report showed the Fed?s preferred price measure, the so-called core inflation reading that excludes food and fuel, rose 0.9 percent in March from a year earlier, matching the 12- month gain in February. The Fed?s so-called central tendency forecast calls for a 1.3 percent to 1.6 percent increase this year.
Figures from the Labor Department today showed employment expenses rose in the first quarter at a rate that indicates inflation may stay subdued in coming months.
The 0.6 percent increase in the employment cost index from January through March followed a 0.4 percent gain in the prior three-month period, Labor Department figures showed today. Economists projected a 0.5 percent climb, according to the median estimate in a Bloomberg survey.
Labor Costs
More than 13.5 million people were unemployed last month, giving workers little leverage to ask for wage increases. Fed Chairman Ben S. Bernanke said this week that surging commodity prices are ?unlikely to induce significant? inflation in labor costs.
The economy began 2011 on a weaker note, expanding at a 1.8 percent annual rate in the first quarter after a 3.1 percent gain in the final three months of 2010, Commerce Department figures showed yesterday. Consumer purchases rose at a 2.7 percent pace, more than forecast, following a 4 percent gain the previous quarter.
Americans may find it difficult to boost their spending as they pay more for groceries and gas. Regular fuel was $3.89 a gallon on April 27, the highest since August 2008, according to AAA, the nation?s biggest motoring organization. Food costs rose 0.8 percent last month, the most since July 2008, consumer-price index data from the Labor Department showed on April 15.
--Editor: Vince Golle, Christopher Wellisz
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net; To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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