Spending tops income
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March 31, 2000: 11:44 a.m. ET
February spending up 1%, outpacing income gain, savings; factory orders drop
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - U.S. consumer spending gained at a faster pace than personal income in February, while the savings rate edged downward to a record low, the government reported Friday, indicating that Americans are outspending their income and not put additional savings in the bank.
In separate reports, the government said factory orders declined for a second month in a row, while the National Association of Purchasing Management-Chicago said its index of production activity rose in March to the highest level in almost a year. Prices paid by producers for raw materials also jumped.
Personal income rose 0.4 percent in February, down from a 0.7 percent increase in January, while spending rose 1 percent, up from the revised 0.6 percent increase registered in January, the Commerce Department said. The amount Americans put aside in savings, meanwhile, slipped to an all-time low at a 0.8 percent pace, down from a revised 1.4 percent rate in January.
All told, the numbers paint a picture of U.S. households spending more than they bring in and not putting much away in savings -- a situation the Federal Reserve has been trying to remedy recently by raising interest rates. At the same time, about half of February's spending increase represents higher gasoline prices and the additional dollars consumers have been forced to part with each time they fill up at the station, Commerce said.
"The underlying trend is one of strong consumption growth and strong spending -- not something the Fed is going to consider particularly positive," said Rob Palombi, a senior markets analyst with Standard & Poor's MMS in Toronto. "The Fed's series of interest rate increases have not yet been enough to significantly deter the consumer from spending."
Less and less in savings
Consumer spending accounts for more than two-thirds of U.S. economic activity and has been one of the principal drivers of the economy, about to enter its record 109th month of uninterrupted expansion.
Of concern to both Fed policymakers and Washington lawmakers has been the country's low personal savings rate and high debt levels, a combination many fear could spur a crisis should a significant stock market correction or other economic shock force individuals to pay back what they owe.
That's one of several reasons Fed Chairman Alan Greenspan and the central bank's policy-making arm have been raising interest rates, to discourage consumers and businesses from borrowing more money and injecting that cash into the already white-hot economy. The Fed has lifted its benchmark Fed funds rate five times since last June; its next policy meeting is May 16.
In addition, the so-called wealth effect, the recent phenomenon by which stock market and other paper gains have made Americans feel more confident in their outlook, is expected to continue to fuel spending, according to economists.
"Consumers continue to spend their earnings from the stock market and other investments," Palombi said. "Even with the correction we've seen recently, the average investor is still significantly ahead of where they were two years ago and is still willing to spend a little of those earnings."
That includes paying more per gallon at the pumps. Oil prices hit nine-year highs in February and early March, prompting gasoline prices to surge upwards to $2 a gallon in some parts of the country. Spending on durable goods increased 1.5 percent in February, after rising 2.4 percent in January. Spending on non-durable goods rose 1.4 percent after a 0.8 percent fall.
Factory orders decline
Separately, the Commerce Department reported Friday that orders at U.S. factories declined 0.8 percent in February, slightly less than the 1 percent drop expected by economists and the revised 1.2 percent decline posted a month before. Excluding transportation, orders rose 0.5 percent in February after declining 0.1 percent in January.
And the National Association of Purchasing Management-Chicago said its index of production activity rose to 57.4 in March from 56.7 in February. Analysts had expected the index to remain unchanged for the month. The prices-paid component, a measure of how much factories are paying for raw materials needed to produce goods, rose to 74.2 percent this month, up from 68.9 a month before and the highest in almost five years.
"Most notable was the leap in the prices-paid index," said Ian Shepherdson, chief U.S. economist with High Frequency Economics. All the same, "this is simply a reflection of higher oil prices but it may not have been fully anticipated in the markets."
Mickey Levy, chief economist with Bank of America, told CNNfn that, even though costs for producers are rising, gains in productivity coupled with strong competition is keeping them from passing on those costs to consumers, ensuring inflation remains in check. (381KB WAV) (381KB AIFF)
The Chicago PMI measures manufacturing activity in the Midwestern region of the country and is typically used by economists and market watchers as a precursor to the NAPM's national survey, due for release next week. The NAPM surveys some 350 of its 45,000 members each month to track economic activity in 20 industries across the United States.
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