US consumer spending up modest 0.3 percent

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Associated Press

Posted on March 28, 2014 at 7:01 AM

Updated Friday, Mar 28 at 8:02 AM

WASHINGTON (AP) — Americans barely increased their spending in February following a weak January performance, strong evidence that the severe winter will hold back the economy in the first quarter.

Consumer spending rose 0.3 percent in February following an even weaker 0.2 percent rise in January, the Commerce Department reported Friday. The January performance was cut in half from an initial estimate of 0.4 percent.

For February, spending on autos and other durable goods actually fell and much of the small gain reflected higher utility payments to pay heating costs.

Analysts said consumer spending, which accounts for 70 percent of economic activity, has slowed significantly in the January-March quarter and will hold back overall economic growth. But they are looking for a rebound in the spring as the weather improves.

Based on the weak February performance and the downward revision to January, economists at Barclays said they were trimming their forecast for overall economic growth in the first quarter to a 2 percent rate, down from a previous estimate of 2.4 percent.

Analysts believe a second quarter rebound will be driven by pent-up demand for the purchase of items such as cars that were put off during the winter storms.

"We expect consumer spending to be significantly stronger in the second quarter," said Chris G. Christopher, director of consumer economics at Global Insight. "Auto sales are expected to heat up in March and for the remainder of the year."

The report showed that after-tax income was up 0.3 percent in February, the same as in January.

The saving rate edged up slightly to 4.3 percent of after-tax income compared to January, when the saving rate was 4.2 percent.

The report showed that inflation remains very low. An inflation gauge tied to consumer spending was up just 0.9 percent in February compared to a year ago, significantly below the 2 percent target set by the Federal Reserve.

The Fed last week approved another reduction in its monthly bond buying, which the central bank is doing to lower long-term interest rates and boost economic growth. But some economists are concerned that if the Fed removes its support too quickly, it could undermine efforts to get prices rising closer to the target.

Economists expect that spending will rebound in the April-June period, helping to boost overall economic growth to its strongest pace in nearly a decade.

Many analysts foresee the economy growing 3 percent for the year, after a weak first quarter. It would be the most robust annual expansion since 2005, two years before the Great Recession began.

The National Association for Business Economics is predicting that the economy will grow 3.1 percent this year, far higher than the lackluster 1.9 percent gain in 2013.

If that forecast proves accurate, it would make 2014 the strongest year since the economy, as measured by the gross domestic product, expanded 3.4 percent in 2005. Since the Great Recession ended in June 2009, annual growth over the past four years has averaged a weak 2.2 percent.

The U.S. economy has been hit by a series of blows since then from a prolonged European debt crisis which hurt U.S. exports to three years of Washington budget fights, which fueled uncertainty about the government's spending and tax policies.

Tax increases and deep spending cuts that took effect in 2013 subtracted an estimated 1.5 percentage points from growth last year.

With Congress having reached a budget agreement and a deal to raise the government's borrowing limit, companies now have more certainty about federal fiscal policies and because of that, analysts say businesses are likely to boost their hiring and investment spending.

The number of people seeking unemployment benefits last week reached its lowest level since November — an encouraging sign that hiring should be picking up. In February, U.S. employers added 175,000 jobs, far more than in the two previous months. With more people working, more consumers will have money to spend to boost the economy, analysts believe.

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