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U.S. Economy: Spending, Jobs Data Ease Inflation Talk (Update1)

U.S. Economy: Spending, Jobs Data Ease Inflation Talk

March 31 (Bloomberg) -- Reports on consumer spending, incomes and jobless claims eased concern that the economy is overheating, tempering speculation that the Federal Reserve may need to accelerate interest-rate increases to thwart inflation.

Personal spending rose 0.5 percent in February while incomes rose a less-than-expected 0.3 percent, the Commerce Department said today in Washington. The Labor Department said today the number of Americans seeking first-time jobless benefits jumped in the last weekly tally before tomorrow's monthly jobs report.

The spending report showed that inflation stayed within the Fed's predicted range, with prices excluding food and energy rising 1.6 percent in the 12 months through February. Increases in spending and incomes bolstered expectations the economy is expanding at the ``solid pace'' the Fed described last week.

``These figures tend to support the Fed's measured approach in removing accommodation, and act to calm fears that inflation is accelerating too quickly,'' said Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York.

First-time unemployment-benefit applications unexpectedly rose to 350,000 last week, the highest since the week that ended Jan. 8, from 330,000, the Labor Department said in a report that was skewed by a holiday. Treasury notes rose after the report.

``This is an unpleasant surprise, but it is almost certainly a reflection of the seasonal adjustment difficulties caused by the early Easter,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York.

Chicago, Factory Reports

A measure of prices also fell in a report today that showed the strongest activity for Chicago-area businesses since July 1988. The National Association of Purchasing Management-Chicago said its Business Barometer rose to 69.2 this month, the highest since July 1988, from 62.7 in February. A measure of prices paid fell to 68.2 from 70.1, while an employment gauge was the highest since December 1983.

Orders at U.S. factories rose less than forecast in February, restrained in part by a drop in demand for automobiles and appliances, according to another Commerce Department report today. The 0.2 percent increase to $380.4 billion trailed the predicted 0.5 percent median estimate in a Bloomberg News survey. Orders excluding transportation fell 0.1 percent.

``The economy is good right now; last year it was great,'' said William Zollars, chief executive officer at Yellow Roadway Corp., the biggest U.S. trucker, in an interview. ``It's pretty tough to compare to last year, but things still look pretty solid.'' The Overland Park, Kansas-based, company last week raised its forecast for first-quarter earnings as it benefits from better freight rates and cost reductions.

Market Reaction

Investors bought Treasury securities, pushing down the yield, after the reports. The benchmark 10-year Treasury note rose 1/4 point, pushing the yield down 3 basis points to 4.51 percent at 10:42 a.m. in New York.

U.S. personal spending rose for the eighth straight month, as job growth helped propel income and sales. February's increase followed a 0.1 percent gain in January, the Commerce Department said. Incomes rose 0.3 percent after falling 2.5 percent the prior month. The savings rate declined.

Job growth is giving people the income to buy clothes, cars and other goods even as they pay record prices for gasoline. Such purchases will help keep the economy motoring after growing last year by the most since 1999. The economy added 220,000 jobs this month after a 262,000 gain in February, based on the median forecast in a Bloomberg News ahead of tomorrow's report.

``The improving labor market is the principle factor keeping spending afloat,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland, who correctly forecast the rise in spending. ``I do expect to see improvement in wages by yearend.''

Inflation

Economists predicted spending would rise 0.5 percent after the government previously reported no change for January, according to the median of 72 estimates in a Bloomberg News survey. Incomes were forecast to rise 0.4 percent.

Prices of goods and services bought by consumers rose 0.3 percent last month after rising 0.2 percent in January. They rose 2.3 percent from February of last year compared with a 2.2 percent year-over-year rise in January.

Gasoline prices averaged $1.95 a gallon last month, up from $1.87 in January. In the week ended March 28, retail gas prices rose to a record $2.194 a gallon, according to Department of Energy figures.

The report's gauge of prices tied to spending, excluding volatile food and energy prices, rose 0.2 percent, less than the 0.3 percent increase in core consumer prices the Labor Department reported last week.

Fed Policy

The core-prices gauge is tracked by Federal Reserve Chairman Alan Greenspan and other policy makers. Compared with February of last year, the core measure was up 1.6 percent, the same as in January, which compares with the Fed's 1.5 percent to 1.75 percent forecast for this year.

Fed policy makers raised their benchmark interest rate last week a quarter percentage point to 2.75 percent, the seventh increase since June. A March 22 statement from the Federal Open Market Committee said that ``pressures on inflation have picked up in recent months and pricing power is more evident.''

Consumer purchases rose 0.3 percent after falling 0.1 percent in January when adjusted for changes in prices, the government reported. Spending on durable goods such as autos, furniture, and other long-lasting items, adjusted for inflation rose 1 percent after declining 4 percent a month earlier.

Purchases of non-durable goods rose 0.2 percent while spending on services, which account for almost 60 percent of all purchases, rose 0.2 percent.

Retailers

Disposable income, or the money left over after taxes, increased 0.3 percent in February following a 2.8 percent drop the previous month.

Wages and salaries increased 0.2 percent, the smallest since November, after rising 0.6 percent. Last year, wage growth accelerated to 4.9 percent from 2.6 percent in 2003.

Retailers including Wal-Mart Stores Inc. and Kohl's Corp. posted their biggest sales gain in February in nine months. Same- store sales rose 4.9 percent from a year earlier, the International Council of Shopping Centers said March 3, based on results at 69 chains.

``We were very pleased with the start of 2005,'' said David Chamberlain, chief executive officer at Stride Rite Corp., a Lexington, Massachusetts-based maker of footwear. ``Our first- quarter sales and earnings growth was strong.'' Stride Rite's sales rose 11 percent in the first quarter compared with the same three months last year.

Cars and light trucks sold at an annual rate of 16.3 million last month, up from 16.2 million in January, industry figures showed. They reached 18.4 million in December, the best since October 2001.

Tax refunds may also have helped underpin spending. U.S. taxpayers received an average income tax refund of $2,232 this year through March 25, up 5.6 percent from the same time in 2004.

To contact the reporters on this story:
Joe Richter in Washington at [e-mail]


LINK: http://quote.bloomberg.com/apps/news?pid=10000006&sid=aH79MJ1jPVOo&refer=home