March Consumer Sentiment Hits Six-Month Low; Incomes Rise Sharply

Consumer sentiment fell in March to its lowest in six months as worries about rising prices and slowing income gains weighed amid an uncertain outlook for the economy, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said the final March reading of its consumer sentiment index slid to 88.4 from 91.3 in February.

The final March reading was the lowest since 85.4 in September 2006. The preliminary March reading released earlier this month was 88.8.

The median forecast on the overall sentiment reading among analysts polled by Reuters was 88.5.

"Rising prices, slowing income gains and growing concerns about the health of the economy were more evident among upper-income households," a statement accompanying the Reuters/University of Michigan data said.

The survey's gauge of current economic conditions fell to 103.5 in March from 106.7 in February. Its final measure on consumer expectations also fell to a six-month low of 78.7 from 81.5 at the end of February.

The survey's one-year inflation index held steady at 3.0 percent for a third straight month in March, and its five-year inflation index remained unchanged at 2.9 percent for the second month in a row.

The Reuters/University of Michigan Surveys of Consumers, a monthly series of data on U.S. consumer sentiment, are produced by the University of Michigan in Ann Arbor, Michigan. From January 2007, Reuters has exclusive rights to distribute the data.

Incomes Rose More Sharply Than Expected in February

U.S. incomes rose much more sharply than expected in February, while spending and core consumer price growth also outpaced forecasts, a government report showed on Friday.

The report comes on a busy day for economic reports. Later, there also will be reports on construction spending at 10 am New York time, the March University of Michigan consumer sentiment poll also at 10 am, and the March Chicago PMI survey at 9:45 am.

The Commerce Department said personal income rose 0.6% in February, below the unrevised 1.0% gain for January but double the 0.3% increase forecast by analysts in a Reuters poll.

February consumer spending also rose 0.6% after an unrevised 0.5% January gain. Analysts had forecast just a 0.3% rise in consumer spending.

Core consumer prices, which exclude volatile energy and food costs, rose 0.3% in February, outpacing forecasts for a 0.2% rise, following a downwardly revised 0.2% gain in January.

The core prices were up 2.4% compared with a year earlier after a downwardly revised 2.2% gain in January. Officials at the Federal Reserve have said they prefer the 12-month rise in core prices to remain between 1% and 2%.

The February savings rate was unchanged with January at a negative 1.2% of disposable personal income. The savings rate has been negative since April 2005.

As for the the University of Michigan's finalized report on March consumer spending moods, the market is expecting the index to fall to 88.5 in March from 91.3 in February.

The index, which reached a two-year high in January, could be affected by recent market declines and jitters about the condition of the economy. The report monitors consumer willingness to spend money, and is considered a better indicator of mood versus actual spending habits.

The Conference Board said earlier in the week that its broader March consumer confidence index fell to 107.2, the lowest level since November. The decline was larger than Wall Street expected. The index was at 112.5 a month earlier, which had been its highest level in five-and-a-half years.

Analysts at that time noted, however, that lower confidence doesn't necessarily translate to a drop in spending, especially with the labor market as stable as it is.

Construction Spending Rises by Largest Amount in 11 Months

In a separate report, the Commerce Department said that construction spending rose by 0.3% last month, the best showing since a 1% jump in March 2006. Until the February increase, construction had either fallen or had been flat since the big rise last March.

Strong gains in construction of hotels, shopping centers and state and local government projects offset the 11th consecutive decline in residential construction.

The increase in construction was a surprise. Economists had expected the continued weakness in housing to result in a 0.4% overall decline.

Housing construction did fall by a sharp 1% after dropping 1.7% in January, but nonresidential spending rose by 2.3% and state and local projects increased 0.6% to an all-time high.

The strength in consumer incomes and spending and construction should help to alleviate recession fears that have been growing because of a deeper-than-expected slump in housing and troubles in the domestic auto industry.

U.S. Midwest Business Sees Surprise March Expansion

Business activity in the U.S. Midwest expanded in March at a very strong pace, confounding expectations for a third month of contraction, on the back of a rush of new orders, a report showed on Friday.

The National Association of Purchasing Management-Chicago business barometer jumped to 61.7 from 47.9 in February, its highest reading since early 2005.

A reading above 50 indicates expansion, but the NAPM-Chicago index had been below that level for two months, suggesting a slowdown in the regional economy. Economists had forecast the index at 49.2.

"The Chicago PMI is an almost shockingly strong number," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.

New orders surged unexpectedly to 72.2 from 48.7, while production jumped to 64.9 from 51.2. Lead-times for the purchase of capital equipment also shortened.

The employment component of the index fell to 45.0 from 50.6 and prices paid eased to 59.1 from 63.2.

The surprisingly strong report triggered a jump in U.S. Treasury yields, with the benchmark 10-year note yield rising to 4.64% from 4.62% earlier.

Short-term interest rate futures fell modestly, trimming chances of a Federal Reserve interest rate cut this year.

"It does show the economy is doing fairly well, and the idea that the Fed is going to cut rates just keeps receding," said Edgar Peters, chief investment officer at PanAgora Asset Management in Boston.