Consumer spending in the U.S. unexpectedly declined in April

Shobhana Chandra - May 31, 2013

Consumer spending in the U.S. unexpectedly declined in April for the first time in almost a year as incomes stagnated, indicating that the largest part of the economy will struggle to pick up without bigger job gains?
Purchases fell 0.2 percent after a 0.1 percent gain in March that was smaller than previously estimated, a Commerce Department report showed today in Washington. Incomes were unchanged and prices dropped by the most in more than four years. Other reports showed consumer confidence and business activity jumped in May.The figures point to a cooling in growth this quarter as higher U.S. payroll taxes and budget cuts restrain the world’s largest economy, giving Federal Reserve policy makers reason to keep pumping money into financial markets. At the same time, record-low inflation combined with rebounds in home and stock prices are shoring up confidence, which will help prevent an extended pullback in demand?“Spending growth is going to be soft,” said Gus Faucher, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected the drop in spending. “Inflation is too low from the Fed’s perspective, so they are going to be cautious about tapering” bond purchases intended to boost the economy, he said. “We will see better growth toward the end of the year.”Stocks fell, paring the seventh monthly gain for the Standard & Poor’s 500 Index, as investors weighed today’s economic data. The S&P 500 dropped 1.4 percent to 1,630.74 at the close in New York.

Growth Forecast

Growth will ease this quarter to a 1.6 percent annualized rate, according to the median forecast of economists in a separate Bloomberg survey conducted earlier this month. The second half will show improvement, with GDP projected to climb at an average pace of 2.4 percent.The U.S. is still faring better than the euro area, where a report today showed unemployment increased to a record in April after the currency bloc’s recession deepened in the first quarter. The jobless rate rose to 12.2 percent from 12.1 percent in March, the European Union’s statistics office in Luxembourg said.

American companies are weathering the slowdown in overseas demand, according to another report today.

The MNI Chicago Report’s business barometer rose to 58.7, exceeding all forecasts in a Bloomberg survey and the highest since March 2012, from 49 in April. A reading greater than 50 signals expansion. Manufacturing makes up about 12 percent of the economy and may be helped as consumer purchases of automobiles and gains in housing keep factories running.

July 1983

The 9.7-point jump in the Chicago index was the biggest since July 1983. Economists watch the gauge and other regional manufacturing reports for an early reading on the national outlook. The group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.

The report showed orders, factory employment and production all accelerated during the month.

Companies predicting some pickup in manufacturing include Weyerhaeuser Co., which has benefited from a housing rebound.

“We’ve got a lot of leverage to the housing industry through our timberlands, our wood products manufacturing and our homebuilding business,” chief executive officer Daniel S. Fulton said in a May 21 presentation. “We’re finally at a stage where I can say with a lot of confidence, housing recovery is underway.”

Consumer Sentiment

Strength in residential real estate is propelling consumer confidence as well. Sentiment climbed in May to the highest level in almost six years, according to figures from Thomson Reuters/University of Michigan. The group’s final sentiment index increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier.

More optimism may help underpin household purchases after the weak start to the second quarter. The drop in consumer spending last month was the first since May 2012. The March reading was previously reported as an increase of 0.2 percent.

The saving rate was unchanged at 2.5 percent even as spending dropped, reflecting the lack of income growth. Wages and salaries were also unchanged in April, showing why gains in sentiment require a pickup in the labor market to translate into more spending.

Labor Market

Employers hired a net 165,000 workers in May, the same as in April, economists projected ahead of the Labor Department’s payrolls report next week. The jobless rate probably held at a four-year low of 7.5 percent, they said.

The Commerce Department’s price index tied to purchases, the gauge tracked by Fed policy makers, fell 0.3 percent in April, the biggest drop since December 2008, as fuel costs retreated. The so-called core price measure, which excludes food and fuel, was unchanged from the prior month and was up 1.1 percent from April 2012, matching a record low.

Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, real purchases rose 0.1 percent, the smallest advance since October, after a 0.2 percent increase in the previous month, today’s report showed.

First Quarter

Strength in consumer spending and business investment helped the economy weather government cutbacks, revised first-quarter data showed yesterday. Gross domestic product rose at a 2.4 percent annualized rate, and household spending expanded 3.4 percent, the most since the last three months of 2010.

Consumers also probably had smaller utility bills last month as temperatures warmed following the coolest March since 2002, helping curb total spending. Spending on services, which includes utilities, declined 0.1 percent after adjusting for inflation.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz atcwellisz@bloomberg.net

Managing the economy - Time for a new solution

The recession that was caused in no small part by the financial crisis shows no sign of nearing an end. If there is a glimmer of light in the UK coming from the end of the tunnel, it might prove to be a very long tunnel.

The latest news from around the world does not create much optimism that we will come out of the recession any time soon.

Unemployment across the single currency Eurozone has reached record highs

Chinese growth appears to be slowing

Managing individual economies has become increasingly complex over the last few decades as international trade and international banking have caused the economic problems of individual nations to reverberate around the world. Historically the international impact would usually be no more than ripples. Foreign exchange rates would then fluctuate and help to provide a local solution by making exports cheaper.

In the world of today the international nature of markets and banks has made the problems more widespread and in turn more severe. With the current fragile state of national economies and international banks the ripples have become waves that threaten to have a knock on impact like a house of cards.

The economists of today have a standard set of tricks up their sleeves. In simple terms, they look at statistical indicators such as employment levels and inflation rates or price indices to gauge how the economy is doing. Based on a belief that the availability of money acts like a tap to stimulate or dampen economic activity, the strategy usually employed is to play with interest rates to encourage or discourage borrowing. With interest rates already having hit rock bottom then money supply must be influenced directly by the Central Bank to stimulate the economy hence quantitative easing.

The coalition came into power with a supposedly unavoidable austerity package. The opposition suggested that they would have handled the situation but it is hard to be certain what they would have done if in power when faced with the reality of the impact of their decisions. If as some believe policy is made by the Civil Service and then wrapped to match the colour of the politicians would their strategy have been that different.

It is important to realise the important since of confidence in the behaviour of markets, particularly financial markets. With every more complex markets, the players in the market place look for ways to make decisions using information provided by specialist information gatherers. Credit ratings re given to all major business to provide an indication of the risk associated with lending money. These credit ratings are also applied to countries. Most countries look to increase their borrowing through the international market place. If the credit rating is poorer then the risk is considered to be higher and so the interest rate, the cost of borrowing money, is higher.

Before the monetarist approach to managing the economy, there was a strong belief that the government should spend money to create jobs that in turn would increase overall disposable income and stimulate the economy.  There are at least a couple of weaknesses in this strategy. Firstly, the jobs need to be sustainable employment to have a long term impact. This is much harder to achieve than digging holes and filing them in again. Secondly the increase in spending would create a need to borrow more money. After several years of a flourishing economy, the country should have low borrowing and be in the position to raise funds for growth. However this is not the case.

An alternative way to raise funds is to increase the money flowing into the Teasury through taxation and similar sources. Historically the UK has been a good place to trade though not cheap in tax terms.
This has encouraged tax avoidance which is legal planning within the law to reduce exposure to taxation. This should not be confused with tax evasion which is illegal.

Is it not now time to move away from the Civil Servants and look to find a new understanding of  the international play of markets in the 21st Century and the implementation of new approaches to stimulate the economy? This needs to be a worldwide approach with a combined commitment to  work.