Positive signs seen for economy

Jeannine Aversa

Tuesday, May 29, 2001 | 10:44 a.m.

WASHINGTON -- Consumers were choosy shoppers in April: They spent on services but cut back on big-ticket items, such as cars. Their confidence in the economy, however, rebounded in May after a sharp drop the month before.

The Commerce Department reported today that consumer spending rose by 0.4 percent in April, following a 0.2 percent increase in March.

In another report, the New-York based Conference Board said its Consumer Confidence Index rose to a greater-than-expected 115.5, up from a revised 109.9 in April. The bounce-back underscored increased optimism about jobs and the future of the economy.

The board's survey of consumers was completed before Saturday's congressional approval of a $1.35 trillion, 10-year tax cut that President Bush intends to sign during the first week of June.

Federal Reserve Chairman Alan Greenspan has said one of the biggest factors determining whether or not the country will skirt a recession is how well consumers hold up during the economic slowdown, which has gripped the nation since the second half of last year.

Consumer spending accounts for two-thirds of all economic activity and has been a main pillar propping up the country's fragile economy.

The Commerce Department's report also showed that Americans' incomes, which include wages, interest and government benefits, nudged up 0.3 percent in April, down from a 0.5 percent rise in March. The increase in April income was the smallest since November.

The spending and income figures aren't adjusted for inflation and were in line with many analysts' expectations.

In an effort to ward off a recession, the Federal Reserve has slashed interest rates five times this year, lowering borrowing costs for millions of consumers and businesses to its lowest point in seven years.

The economy grew at an annual rate of just 1.3 percent in the first quarter, a big downward revision from the previous estimate of a 2 percent growth rate. The biggest factors weighing down growth: a steep drop in business investment and a huge reduction in business inventories, both of which reflect flagging demand.

In April, consumers' spending on nondurable goods, such as food and clothes, rose by 0.7 percent, compared with a 0.3 percent drop in March.

Spending on services rose by 0.5 percent in April, down from a 0.7 percent gain the month before. The services category includes such things as gas and electric utilities, doctors visits, bus and train fares and rent for housing.

But spending on durables -- costly manufactured goods expected to last at least three years, such as cars and washing machines -- fell by 0.6 percent in April, on top of a 0.7 percent decline in March. None of those spending figures are adjusted for inflation.

When adjusted for inflation, spending on durable goods fell by 0.4 percent, spending on nondurables rose 0.3 percent and spending on services edged up 0.2 percent in April, suggesting that higher prices accounted for a large chunk of the rise in spending.

With spending outpacing income growth, the personal savings rate -- savings as a percentage of after-tax income -- dipped to a negative 0.7 percent in April, compared with a negative 0.6 percent in March.

The savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real estate values or from financial investments, economists say.

Rising layoffs and higher energy prices are factors making consumers more cautious in their spending, economists say.

The nation's unemployment rate jumped to 4.5 percent in April, a 0.2 percentage point increase from March, and businesses slashed payrolls by the largest amount since the country was last in a recession a decade ago.

Many economists expect that when the government releases the employment report for May on Friday it will show that the jobless rate edged up to 4.6 percent.

Economists are concerned that if the employment picture worsens, consumers might sharply cut spending and tip the economy into a recession. But many continue to believe that the Fed's aggressive interest rate cuts and tax relief will permit the economy to dodge a recession this year.