BUSINESS

US consumer spending flat in April as higher incomes boost savings

06/01/2015 09:27 EDT | Updated 06/01/2016 05:59 EDT
WASHINGTON - U.S. consumers held back from spending more in April, deciding instead to channel income gains into savings.

Consumer spending was flat in April — the weakest performance in three months — after a revised 0.5 per cent increase in March, the Commerce Department reported Monday. The March advance had been the biggest gain since last August. Personal income rose a healthy 0.4 per cent.

The unchanged reading for consumer spending in April had been expected given weakness previously reported in retail sales and auto sales for the month. Economists, however, forecast that spending will rebound in coming months. Solid gains in employment and incomes should translate into more confident consumers who are willing to spend more.

With income growing and spending flat, the personal saving rate jumped to 5.6 per cent of after-tax incomes — the second highest level since December 2012.

Economists believe consumers will start spending the savings they have accumulated from the big drop in gas prices. While the cost of filing up the tank has risen a bit in recent weeks, prices are still nearly $1 below the levels of a year ago.

Consumer spending is closely watched because it accounts for 70 per cent of economic activity.

"The April income and spending figures are another reminder that even though their incomes are rising at a healthy pace, households are still reluctant to boost spending more freely," said Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients.

He said he still believed the overall economy would grow between 2.5 per cent and 3 per cent in the current April-June quarter.

The overall economy shrank in first three month of the year, with the gross domestic product contracting at an annual rate of 0.7 per cent.

Consumer spending slowed to growth of just 1.8 per cent in the first quarter, down from spending growth of 4.4 per cent in the fourth quarter. The frigid cold in many parts of the country kept shoppers away from the malls. With the arrival of spring and warmer weather, analysts are looking for spending to rebound.

The weakness in April, the first month in the new quarter, reflected big declines in spending on both durable goods such as autos and nondurable goods such as clothing and food. Spending on services, which cover utility bills and rent, edged up 0.2 per cent.

Recent employment gains are expected to fuel spending. The economy created 223,000 jobs in April, pushing the unemployment rate down to a nearly seven-year low of 5.4 per cent.

The Federal Reserve has kept a key interest rate at a record low near zero since December 2008 in an effort to combat high unemployment. Even though the job market has revived, the Fed has left rates alone in part because inflation for nearly three years has been running below the Fed's 2 per cent target.

Many economists believe the central bank, which next meets on June 16, will delay its first rate hike until September.

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This story has been corrected to show that Paul Ashworth is the chief U.S. economist at Capital Economics, not BMO Capital Markets.