Spending up 0.6 percent, fueled by income jump

Carlos Torres

Friday, May 27, 2005 | 9:27 a.m.

U.S. personal spending rose for a third straight month in April, boosted by rising incomes as hiring accelerated, according to a government report. A measure of prices tied to spending showed tame inflation.

The 0.6 percent increase in purchases followed a 0.9 percent gain in March that was stronger than initially estimated, the Commerce Department reported today in Washington. Incomes rose 0.7 percent after a 0.5 percent increase the previous month.

"The consumer is clearly being aided by income gains," said Roger Kubarych, a former Federal Reserve economist who is now a senior economic adviser at HVB America Inc., a New York-based unit of German bank HVB Group. Kubarych correctly forecast April spending. "The prospects are very good" for spending, he said.

The report's price gauge tied to spending patterns and excluding food and energy costs, Fed policy makers' preferred measure for tracking inflation, rose 0.1 percent last month and was up 1.6 percent from April 2004. The increase in prices is expected to keep central bankers raising their target interest rate by a quarter percentage point in coming months, economists said.

"The inflation picture seems likely to continue to support the Fed's measured tightening for the balance of the year," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn., before the report.

A separate report from the University of Michigan showed consumer sentiment fell in May from a month earlier. The final reading of 86.9 was higher than forecast and compares with the 85.3 originally reported. In April, the gauge was at 87.7.

Economists expected spending to rise 0.8 percent after a previously reported 0.6 percent March increase, according to the median of 66 estimates in a Bloomberg News survey. Incomes were forecast to rise 0.7 percent.

Incomes were up 7 percent last month from April 2004, paced by a 7.6 percent gain in wages and salaries. The Commerce Department revised the increase in wages and salaries in the 12 months ended in March to 7.6 percent, compared with a 5.8 percent gain estimated last month. The acceleration reflects revisions to the income components in yesterday's report on gross domestic product.

"The increase in incomes is completely under-appreciated as a driver of the expansion," said Steven Wieting, an economist at Citigroup Capital Markets Inc. in New York. "Increases in wages and other forms of income are enough to get us decent increases in consumer spending" even if gasoline prices hold near current levels, he said.

Disposable income, or the money left over after taxes, increased 0.5 percent in April following a 0.4 percent rise the previous month. Adjusted for inflation, personal spending rose 0.2 percent last month after a 0.4 percent rise.

Adjusted spending on durable goods such as autos, furniture and other long-lasting items, rose 0.8 percent after surging 3.5 percent.

Purchases of non-durable goods increased 0.2 percent after falling 0.8 percent. Real spending on services, which account for almost 60 percent of all outlays, increased 0.1 percent after rising 0.4 percent.

The personal savings rate, which weighs current income from wages, salaries, dividends, businesses and government payments against spending, fell to 0.4 percent, the lowest since October 2001, from 0.5 percent. It doesn't take into account borrowed money, income from investments, or withdrawals from prior savings.

"Everything that we are seeing is extremely positive right now," said Walter Robb, co-chief operating officer of Whole Foods Market Inc., in an interview yesterday. "We are seeing double- digit growth across all areas of the country and all markets. We are just extremely bullish for the balance of the year."

Austin, Texas-based Whole Foods, the largest U.S. natural- foods grocer, said earlier this month that profit for the quarter ended April 10 rose 22 percent from the same period last year as sales rose 20 percent. Sales for the year will increase at the high end of its 15 percent to 20 percent forecast, the company said.

Williams-Sonoma Inc. said yesterday that first-quarter profit rose 22 percent, beating analysts' estimates, on higher sales of furniture at its Pottery Barn chain. Sales in the period ended May 1 rose 12 percent from the same period last year, the San Francisco-based retailer said.

The rise in purchases last month suggests spending will accelerate to a 3.8 percent annual gain this quarter, according to a forecast by economists at Banc of America Securities Inc. in New York. Spending grew at an average 3.5 percent pace per quarter in the last two decades.

Consumer spending helped the economy expand at a 3.5 percent annual rate in the first quarter, faster than the government previously estimated, a report from the Commerce Department yesterday showed. Spending rose at a 3.6 percent annual pace, also stronger than the government initially thought.

Wages and salaries grew by $93 billion at an annual rate in the first quarter after rising by a revised $136 billion in the last three months of 2004 that was more than twice as much as the government previously estimated, yesterday's GDP report showed.

Central bankers next meet on June 30 and are expected to raise the target for the benchmark overnight bank lending rate by a quarter percentage point to 3.25 percent, according to the median estimate in a separate Bloomberg News survey. It would be the ninth straight increase of that size since June 2004.