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Consumer spending up sharply, but incomes lag

Business Forecast

A slight rise in incomes added to concerns that the recovery could weaken unless income growth increases more rapidly.

The Associated Press | May 4, 2010

 
Consumer spending rose in March by the largest amount in five months but the gains were financed out of savings, which fell to the lowest level in 18 months. A slight rise in incomes added to concerns that the recovery could weaken unless income growth increases more rapidly.
 
The Commerce Department said consumer spending rose 0.6 percent in March, matching economists' expectations. Personal incomes edged up just 0.3 percent, raising new worries about lackluster income growth.
 
The March surge in spending was propelled by savings, which drove the personal savings rate down to 2.7 percent of after-tax incomes, the lowest level since September 2008.
 
The fear is that income growth will remain weak, reflecting severely high unemployment, as the job market continues to show the effects of the nation's worst recession since the Great Depression.
 
Unless businesses boost hiring, households will not have the incomes needed to support consumer spending, which accounts for 70 percent of economic activity. That would put the economic recovery in jeopardy.
 
The government reported Friday 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 or 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 cannot be maintained without greater income growth.
 
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