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Consumer spending rose 0.7% in February

But much of the gain went to cover rising food and energy costs, providing only a modest lift to the economy.

March 28, 2011|Reuters

U.S. consumers increased spending for an eighth straight month in February, but much of the gain went to cover rising food and energy costs, providing only a modest lift to the economy.

Although the report from the Commerce Department on Monday was the latest to suggest that the rising cost of living would dent growth in the first quarter, the recovery from the worst recession since the 1930s remains intact.

Personal spending rose 0.7% in February, before adjusting for inflation, after rising 0.3% in January. Incomes rose 0.3% after rising 1.2% in January.

Prices rose 0.4%, the most in just over 11/2 years. Consumer spending accounts for about 70% of U.S. economic activity.

Another report showed pending sales of previously owned homes unexpectedly rose in February, pointing to a rebound in sales in March after a string of poor housing market data.

"Consumer spending is going to come in weaker relative to what the consensus is expecting, and that in turn means the growth expectations are too high. But it doesn't mean that the consumer is going to roll over," said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.

With consumption outpacing income growth, households cut back on saving to cover higher living costs. Savings fell to an annual rate of $676.7 billion from $710.5 billion in January.

Consumer spending rose at a 4% annual rate in the last three months of 2010, the quickest in more than four years. That helped spur the economy ahead at a 3.1% pace.

Many economists expect spending to grow at a fairly tepid rate of 2% to 2.5% in the first quarter, with the overall economy expanding 2.5% to 3.5%.

But some see auto sales firming and expect overall spending to be fairly solid.

"Anecdotal reports suggest at least moderately strong auto sales are in store for March, which could add to total consumer spending for the first quarter," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

Automakers will release March's sales figures Friday.

Consumers last month spent more freely on long-lasting goods, such as cars, and some economists took that as a sign of confidence in the economy.

"We will carefully watch Friday's March vehicle sales data to see if the trend appears to be continuing, even though consumer attitudes have soured in March on higher energy prices," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

A report Friday showed consumer sentiment at its lowest level in more than a year.

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