Consumer spending up 0.3 percent in April

Torsten Blackwood / AFP - Getty Images

Incomes have been lagging in this sub-par recovery, meaning households have less to spend.

By msnbc.com news services

WASHINGTON ? Consumer spending rose modestly in April while incomes grew more slowly and inflation pressures eased, according to Commerce Department data published on Friday.

Spending climbed 0.3 percent, in line with forecasts in a Reuters poll and following a downwardly revised 0.2 percent gain for March.

Incomes increased just 0.2 percent, half of March's pace and weaker than analyst estimates.

At the same, the Federal Reserve's preferred measure of inflation remained comfortably within the central bank's 2 percent target, at 1.9 percent.

Gross domestic product expanded just 1.9 percent in the first quarter, following downward revisions to an initial estimate this week. The softness raised new concerns about the economy's vigor as worries about a Europe-led slowdown persist.

Consumer spending accounts for 70 percent of economic activity. Economists hope consumers will keep spending to support further economic growth. But the concern is that incomes have been lagging in this sub-par recovery, meaning households have less to spend. The small April income gain will add to those worries.

Worries about income growth will likely increase in light of a separate report Friday showing that the nation created just 69,000 jobs in May, the fewest in a year. The unemployment rate rose to 8.2 percent from 8.1 percent in April, the first increase in 11 months. Weak job growth translates into weak income growth.

With consumers spending more in April at the same time their earnings growth slowed, they financed the difference by tapping savings. The savings rate as a percent of after-tax incomes dipped to 3.4 percent, matching a low hit in February. The 3.4 percent rate was the lowest since the savings rate stood at 2.6 percent in December 2007, just as the recession was beginning. The deep downturn and high unemployment prompted Americans to save more. The annual savings rate climbed to 5.4 percent in 2008 after dipping to a low of 1.5 percent in 2005, a year when soaring home prices made Americans feel less of a need to save.

For the January-March quarter, consumer spending rose at an annual rate of 2.7 percent, the strongest performance since the last quarter of 2010. But there was concern because Americans are receiving little or no pay raises. After-tax income adjusted for inflation rose at an annual rate of just 0.4 percent in the first three months of this year and that followed an even smaller 0.2 percent increase in the final three months of 2011.

The overall economy expanded at an annual rate of 1.9 percent in the January-March quarter, helped considerably by the solid gain in consumer spending.

Economists estimate the economy is growing at an annual rate of 2 percent to 2.5 percent in the current April-June quarter and they expect growth for the entire year will come in around 2.5 percent. That would be an improvement from last year's anemic 1.7 percent growth rate. But it is just about half the rate that economists believe is needed to make a significant reduction in the unemployment rate.

An inflation gauge tied to consumer spending showed no increase in April, reflecting falling energy prices. Core prices, which exclude energy and food, rose a tiny 0.1 percent in April and are up a modest 1.8 percent over the past year, the smallest 12-month gain since February 2011. That puts the price increases within the Federal Reserve's 2 percent level for inflation, meaning if the economy needs further help, many Fed officials would probably feel they have the leeway to do more.

Reuters and the Associated Press contributed to this report.

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