Consumer spending spurs stocks higher

But new revised data from January led JPMorgan Chase and RBS Securities economists to cut first quarter growth forecasts

Mar 29, 2014 @ 1:07 pm

Consumer spending climbed in February by the most in three months as a pickup in incomes encouraged Americans to return to stores after a harsh winter held the economy back.

Household purchases, which account for almost 70 percent of the economy, rose 0.3 percent after a 0.2 percent gain in January that was weaker than previously estimated, according to Commerce Department figures released on Friday in Washington. The increase matched the median forecast in a Bloomberg survey of economists. Incomes also advanced 0.3 percent.

The January revision to the spending data showed the economy suffered even more from the frigid weather at the start of the year than previously projected, prompting economists at JPMorgan Chase & Co. and RBS Securities Inc. to cut first-quarter growth forecasts. That underscores the need for bigger increases in employment to spur wage gains and purchases.

“The February numbers are fine, but there was a big revision moving January down,” said Guy Berger, a U.S. economist at RBS Securities in Stamford, Connecticut, who correctly forecast the gain in spending. “That additional boost in employment that we're probably going to see in March, and maybe one or two of the other spring months, is probably going to boost income growth.”

Disposable income, or the money left over after taxes, rose 0.3 percent after adjusting for inflation, the most since September. It climbed 2.1 percent from February 2013. Wages and salaries increased 0.2 percent after a 0.3 percent gain.

Stocks rose on Friday after a two-day slide as consumer shares rebounded. The Standard & Poor's 500 Index advanced 0.5 percent to 1,857.62 at the close in New York.

STOCKS RISE

Friday's report showed that inflation-adjusted consumer spending, used to calculate gross domestic product, increased 0.2 percent, also the best performance since November, after a 0.1 percent advance the previous month.

JPMorgan lowered its first-quarter GDP estimate to a 1.5 percent annual rate from 2 percent after data including consumer purchases for January and capital spending came in weaker than expected, according to a note sent to clients on Friday.

“A sense of the true underlying momentum of the recovery remains elusive,” chief U.S. economist Michael Feroli wrote in the note. “Of course, the biggest question mark is the unseasonably cold and stormy weather and the degree to which that may have temporarily depressed activity.”

RBS Securities revised down the pace of first-quarter growth to about 1.2 percent from 1.5 percent, while Credit Suisse lowered its estimate to 1.3 percent from 1.6 percent.

CONSUMER SENTIMENT

Consumers were less optimistic in March as well, other Friday figures showed. The Thomson Reuters/University of Michigan final reading fell to a four-month low of 80 from 81.6 in February. At the same time, the report showed one in three of those surveyed said their financial situation would improve in the coming year, the highest share since June 2009.

Confidence in Europe increased more than forecast, a report showed on Friday. An index of executive and consumer sentiment rose to the highest level since July 2011, according to the European Commission in Brussels.

Friday's spending report showed purchases of durable goods, including automobiles, increased 0.1 percent after adjusting for inflation following a 0.4 percent drop in January. Purchases of non-durable goods, which include gasoline, gained 0.3 percent.

Household outlays on services climbed 0.2 percent after adjusting for inflation. In addition to health care, the category also includes utilities, tourism, legal help and personal care items such as haircuts. This makes it typically difficult for the government to estimate accurately in the preliminary report.

LIMITED INFLATION

Friday's data also showed the core price measure, which excludes fuel and food, rose 1.1 percent from a year ago, the same as in January.

Total prices, which are the ones tracked by Federal Reserve policy makers, were up 0.9 percent from February 2013, the smallest year-to-year gain since October. That remains well below the central bank's 2 percent goal.

Fed officials are monitoring the recovery as they pursue plans to gradually dial back their bond-buying program, known as quantitative easing. The central bank reduced its monthly pace of bond purchases by $10 billion, to $55 billion, on March 19.

“Growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions,” the Fed said in a statement announcing the change. Even so, “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions.”

LABOR MARKET

Payrolls climbed by 175,000 in February after a 129,000 gain a month earlier, Labor Department data showed earlier this month. The jobless rate rose to 6.7 percent from 6.6 percent, a five-year low, as more people entered the labor force and couldn't find work.

Employment increased in 33 states in February, while the jobless rate declined in 29, the agency said today. California and Texas led the nation in payroll gains last month.

The three months ended February marked the coldest winter since 2009-2010, according to the National Climactic Data Center at the National Oceanic and Atmospheric Administration.

(Bloomberg News)

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