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April 4, 2006 > Consumer spending and income growth both slow in February

Consumer spending and income growth both slow in February

by MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP), March 31 _ Consumer spending slowed to the weakest pace in six months in February, while incomes grew at the slowest rate since November.

The Commerce Department said Friday that personal consumption spending rose by a weaker-than-expected 0.1 percent following the huge 0.8 percent increase in January, which had been aided by a mild winter.

Personal incomes were up 0.3 percent in February, less than half the 0.7 percent January jump, which had been boosted by government pay raises and by cost-of-living adjustments for millions of Social Security recipients.

Analysts discounted much of the slowdown in spending as a payback after the weather-related January increase. February weather acted to depress sales, especially in the Northeast, which was hit by a severe snowstorm.

``Consumers may have throttled back a touch in February, but given the weather and all they had spent the previous few months, we cannot conclude that consumption is faltering,'' said Joel Naroff, chief economist at Naroff Economic Advisors.

On Wall Street, the Dow Jones industrial average dropped 41.38 points Friday to close at 11,109.32.

Even with the slowdown in consumer spending and income growth in February, analysts believe the overall economy will show a significant rebound after slowing significantly in the final three months of last year.

Many analysts are looking for the gross domestic product, the total output of goods and services, to race ahead at an annual rate of 4.5 percent or higher in the January-March quarter after slowing to a meager 1.7 percent growth rate in the fourth quarter of last year.

That expected rebound will be largely driven by faster consumer spending, which grew by just 0.9 percent at an annual rate in the fourth quarter, the slowest pace in more than a decade.

Economists believe first quarter spending will rise at a rate approaching 5 percent but will probably slow to a more sustainable 3 percent rate in the April-June quarter.

Spending rates at these levels will probably keep the Federal Reserve on alert for potential inflation problems, said economists, who predicted Fed policymakers will follow up Tuesday's quarter-point rate hike with a 15th increase at their next meeting on May 10.

But after the May increase, the Fed may move to the sidelines, some analysts said, as evidence mounts that the two-year campaign to gradually tighten credit conditions is having the desired impact.

``The latest report on personal income and spending corroborates other signs showing the economy very gradually downshifting to a slower, more sustainable speed,'' said Bernard Baumohl, executive director of the Economic Outlook Group, a Princeton, N.J., consulting firm.

Disposable incomes, the amount left after paying taxes, rose by 0.2 percent last month after a 0.6 percent January gain. That left the personal savings rate unchanged at a negative 0.5 percent in February, the same as the January reading.

The savings rate, the amount of disposable incomes left after spending is accounted for, has been negative or at zero for 11 consecutive months, a worrisome development at a time when 78 million baby boomers are nearing retirement.

The slowdown in consumer spending in February reflected a big drop of 1.9 percent in purchases of durable goods such as autos and a 0.6 percent drop in spending on nondurable goods.

An inflation gauge preferred by the Federal Reserve showed consumer prices excluding food and energy rose by just 0.1 percent in February with prices up only 1.8 percent over the past 12 months.

In other economic news, orders to U.S. factories edged up 0.2 percent in February, far below the 1.3 percent increase economists were expecting. Factory orders had fallen by 3.9 percent in January.

The February increase was driven by rising demand for commercial aircraft and other big-ticket durable goods, which were up 2.7 percent. But orders for nondurable goods fell 2.5 percent with the weakness led by declines for petroleum products, chemicals and fertilizers.


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