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Consumer Spending Rises at Slowest Pace in Five Months

Consumer spending rose at the slowest rate in five months in March while construction activity managed only a tiny gain, weighed down by further weakness in housing.

Recent Personal Spending Reports

Month
% Chg - Period to Period
% Chg - Year to Year
2006 - Dec + 0.72% + 5.84%
2006 - Jan + 0.60% + 5.55%
2007 - Feb + 0.73% + 5.79%
2007 - Mar + 0.25% + 5.54%
source: Haver Analytics

The Commerce Department reported that consumer spending on all items was up 0.3% last month, the slowest increase since a similar rise in October. Incomes rose by 0.7%, the fourth straight solid month of income growth.

Recent Personal Income Reports

Month
% Chg - Period to Period
% Chg - Year to Year
2006 - Dec + 0.51% + 5.59%
2006 - Jan + 1.09% + 5.34%
2007 - Feb + 0.67% + 5.48%
2007 - Mar + 0.71% + 5.68%
source: Haver Analytics

The Commerce Department reported that consumer spending on all items was up 0.3% last month, the slowest increase since a similar rise in October. Incomes rose by 0.7%, the fourth straight solid month of income growth.

Spending on building projects edged up a slight 0.2% in March as strength in hotel and shopping center contruction offset the 11th drop in housing activity over the past year.

Recent Construction Spending Reports

Month
$ Spent (annual rate)
% Chg - Period to Period
2006 - Dec 1.174 trillion - 0.65%
2006 - Jan 1.168 trillion - 0.58%
2007 - Feb 1.185 trillion + 1.53%
2007 - Mar 1.187 trillion + 0.24%
source: Haver Analytics

In other economic news, the National Association of Purchasing Management-Chicago said its index of Midwest manufacturing activity fell in April to 52.9 from 61.7 in March. Economists polled by Reuters had forecast a April figure of 54.0.

The tiny 0.2% rise pushed total construction activity to a seasonally adjusted annual rate of $1.19 trillion in March, down 2% from a year ago, as the building industry has been hard-hit by the slump in housing.

Effect of Gasoline

The spending performance in March was even weaker when the effects of higher gasoline prices were removed. After adjusting for price increases, consumer spending actually fell by 0.2% in March, the poorest showing since the fall of 2005 when the economy was suffering the aftershocks of Hurricane Katrina.

The weaker-than-expected performance in consumer spending was certain to add to worries that the economy could be in danger of stalling out if consumer confidence falters in the face or rising gasoline prices and a slumping housing market.

The serious slump in housing has been weighing on the economy for the past year with the government reporting last Friday that overall economic growth slowed to an anemic 1.3% rate in the January-to-March quarter, the weakest showing in four years.

In a further sign of the slowdown in housing, the National Association of Realtors reported Monday that sales of second homes were mixed in 2006. Purchases of investment properties fell a sharp 28.9% to 1.65 million units last year, down from a record 2.32 million investment sales in 2005.

However, sales of vacation homes rose by 4.7% last year to a record 1.07 million units, up from 1.02 million vacation homes sold in 2005. Sales of vacation properties and investment homes accounted for 36% of all existing and new home sales last year, down from 40% in 2005, which was the peak of the five-year housing boom, the Realtors reported.

The construction report showed that the 0.2% increase, slightly lower than the 0.3% which had been expected, followed a 1.5% jump in February, a gain that was attributed to better-than-normal weather during the month.

The spending report Monday showed that a price gauge tied to consumer spending was unchanged in March, after excluding the effects of gasoline and food.

This meant that core inflation as measured by personal consumption spending is up by just 2.1% for the past 12 months, much better than the worrisome 2.4% jump recorded for the 12 months ending in February.

Assurance for Fed

The slowdown in inflation outside of energy should provide some assurance to the Federal Reserve, which is hoping that its 17 consecutive interest rate increases will be enough to slow economic growth slightly and keep inflation under control.

The Fed last raised interest rates in June 2006 and since that time has kept rates steady in hopes that it has done enough to trigger a retreat in inflation pressures. The Fed meets again next week, and the widespread view is that it will leave rates unchanged once again.

The 0.7% rise in incomes matched the February gain and followed a sizable 1.1% jump in January which reflected the one-time impact of huge bonus payments paid to high-income executives.

After-tax incomes were also up 0.7% although this gain shrank to just 0.2% when the effects of inflation were removed.

The personal savings rate remained in negative territory for the 24th consecutive month. The rate was a minus 0.8% in March, slightly better than the negative 1.2% recorded in February.

A negative savings rate means that consumers not only used all of their incomes for purchases but also dipped into past savings or increased their borrowing to finance purchases during the month.