Economic outlook is cautious even with spending up

EconomyFactories are churning out more goods. Consumers are spending. Government aid is fueling construction activity. But stagnant pay and weak hiring will likely restrain the economic rebound in coming months.

That cautionary picture emerged from a series of economic reports Monday.

Consumers stepped up their spending in March by the largest amount in five months. Yet the increase was financed out of savings. Incomes rose only slightly.

Unless employers boost pay and ramp up hiring, economists say consumer spending will likely taper off and dampen the recovery.

The construction industry remains a concern, too. Industry spending rose 0.2 percent in March, the first increase in five months, Commerce said. But all the strength came from government activity ? much of it related to temporary stimulus money that’s expected to run out soon. By contrast, construction by the private sector fell to the lowest level in a decade.

One sector that’s helping drive the recovery is manufacturing. Factory production in April grew at the fastest pace in nearly six years, according to the Institute for Supply Management, representing purchasing executives.

Its manufacturing index rose to 60.4 in April from 59.6 in March ? the ninth straight month of growth. A level above 50 indicates expansion.

“We got to see both sides of the economy today. We got a read on the strongest sector, manufacturing, and the weakest, construction,” said Mark Zandi, chief economist at Moody’s Analytics.

Companies are rebuilding their inventories as demand for goods rises. New orders, a gauge of future production, jumped to 65.7 from 61.5 in March, according to the report.

The fastest-growing industries were clothing makers and producers of nonmetallic goods such as glass, mineral wool and ceramic products used in construction. Makers of wood products, the petroleum and coal sector, and plastics and rubber manufacturers also reported strong growth.

Consumer spending has propelled more production in retail goods. On Friday, clothing maker VF Corp., whose brands include Wrangler, The North Face and Vans, said its sales rose 1 percent to $1.75 billion in the first quarter.

Carmakers also benefited from the surge in consumer spending. Analysts say about half of March’s increase went to the industry. Buyer traffic slowed down a little in April, although Ford Motor Co. and Chrysler on Monday both said sales last month were up 25 percent from a year earlier; General Motors Co. said its sales climbed 6.4 percent.

The stock market jumped Monday after the improved economic reports, along with news of a merger between United and Continental Airlines, raised expectations about the recovery. The Dow Jones industrial average rose more than 150 points in late afternoon trading.

Economists caution that the overall picture is clouded by a weak hiring outlook. A report Friday is expected to show no change in the nation’s 9.7 percent unemployment rate.

“Households are spending again but their incomes are not keeping up and that is a worrisome sign,” said Joel Naroff, chief economist at Naroff Economic Advisors Inc. “Household spending can only be supported if we get better income growth.”

The government reported last week that the broadest measure of economic activity, the gross domestic product, grew at an annual rate of 3.2 percent in the January-March period. That marked the third quarterly increase since last summer. Most economists believe the recession, which began in December 2007, probably ended in either June or July of last year.

The healthy first quarter GDP gain was driven by a big rebound in consumer spending, which powered ahead at an annual rate of 3.6 percent, the best showing in three years. But economists said spending gains of that size can’t be maintained without greater income and job growth.

“Employment reports including the one this Friday will be key signals of just how robust consumption will be over the rest of 2010,” said Nigel Gault, chief U.S. economist at IHS Global Insight.

Commerce said consumer spending rose 0.6 percent in March, matching economists’ expectations. But personal incomes edged up just 0.3 percent, raising new worries about lackluster income growth. At the same time, the personal savings rate fell to 2.7 percent of after-tax incomes. It’s the lowest level since September 2008.

During the housing boom, the annual savings rate had fallen as low as 1.7 percent in 2007. Consumers felt more wealthy as their home values soared and felt less of a need to save. But once housing sales and prices collapsed, helping lead to the recession, Americans began saving more. The savings rate rose to 4.3 percent in 2009, the highest level in a decade.

High unemployment is likely to continue to keep a lid on income growth. Unless businesses boost hiring, households won’t be able to support a high level of consumer spending, which accounts for 70 percent of economic activity. That could weaken the economic rebound.

However, consumers have yet to start spending at a level necessary to bring down the unemployment rate. In a new Associated Press Economy Survey, two-thirds of the 44 economists surveyed said they believed the last recession had created a “new frugality” among consumers that will outlive the recession. A desire to save more could also act as a drag on spending going forward.

An inflation gauge tied to consumer spending showed a slight 0.1 percent rise in March and the same 0.1 percent increase excluding food and energy. Over the past 12 months, prices excluding food and energy are up by just 1.3 percent, well within the Federal Reserve’s comfort zone for keeping short-term rates at record lows.

AP Business Writer Tali Arbel in New York contributed to this report.

Source: The Associated Press.