On the rise
Some reasons experts think consumer spending will keep rising.WEALTH IS UP: Home prices rose more than 10 percent in the 12 months that ended in February. And the Dow Jones industrial average and S&P 500 stock indexes hit record highs in the first quarter. As a result, Americans have recovered the $16 trillion in wealth wiped out by the Great Recession.DEBT IS DOWN: Household debt now equals 102% of after-tax income, down from a peak of 126% in 2007. That’s almost back to its long-term trend, according to Deutsche Bank. And households are paying less interest on their debts, largely because of the Federal Reserve’s efforts to keep borrowing rates at record lows. JOBS ARE UP: Employers have added an average of 188,000 jobs a month in the past six months, up from 130,000 in the previous six. Job gains slowed in March to only 88,000. Most economists expect at least a modest rebound in coming months. GAS PRICES ARE DOWN: Gas prices have fallen in the past year and are likely to stay low. Nationwide, the average price of a gallon of gas has dropped 28 cents since this year’s peak of $3.79 on Feb. 27. Analysts expect gas to drop an additional 20 cents over the next two months. LOANS ARE CHEAPER: Lower interest rates have enabled millions of Americans to save money by refinancing their mortgages. Mortgage giant Freddie Mac estimates that in the fourth quarter of 2012, homeowners who refinanced cut their interest rate by one-third, the biggest reduction in the 27 years the agency has tracked the data. Source: AP
WASHINGTON — This year got off to a sour start for U.S. workers: Their pay, already gasping to keep pace with inflation, was suddenly shrunk by a Social Security tax increase.
Which raised a worrisome question: Would consumers stop spending and further slow the economy? Nope. Not yet, anyway.
On Friday, the government said consumers spent 3.2 percent more on an annual basis in the January-March quarter than in the previous quarter — the biggest jump in two years. And in a report Monday, the government said consumers increased their spending in each month, by 0.2 percent in March, 0.7 percent in February and 0.3 percent in January.
The spending increases highlighted a broader improvement in Americans’ financial health that is blunting the impact of the tax increase and raising hopes for more sustainable growth.
Consumers have shed debt. Gasoline has gotten cheaper. Rising home values and record stock prices have restored household wealth to its pre-recession high. And employers are steadily adding jobs.
“No one should write off the consumer simply because of the 2 percentage-point increase in payroll taxes,” said Bernard Baumohl, chief economist at the Economic Outlook Group. “Overall household finances are in the best shape in more than five years.”
Spending weakened toward the end of the January-March quarter. Spending at retailers fell in March by 0.4 percent, the worst showing in nine months. And more spending on utilities accounted for up to one-fourth of the increase in consumer spending in the January-March quarter, according to JPMorgan Chase economist Michael Feroli, because of colder weather. Higher spending on utilities isn’t a barometer of consumer confidence the way spending on household goods would be.
Americans also saved less in the first quarter, lowering the savings rate to 2.6 percent from 3.9 percent in 2012. Economists say that was likely a temporary response to the higher Social Security tax, and most expect the savings rate to rise back toward last year’s level. That could limit spending. But several longer-term trends are likely to push in the other direction, economists say, and help sustain consumer spending.
Scott Loehrke, 25, hasn’t cut back spending this year. Loehrke went ahead in March with some car repairs that could have been delayed. And he still plans to vacation in May in Mexico with his wife, Jackie.
The Cleveland-area couple feel secure in their jobs. Loehrke is a salesman for a company that makes T-shirts and other promotional products. Business has picked up in the past year as the economy has improved. His wife is a pharmacist. “Everything that we’ve planned to do we’re still doing,” Loehrke said.