- The Washington Times - Friday, June 27, 2003

Consumer spending picked up in the past two months as incomes grew solidly, confidence improved and prices fell for cars and other goods, the Commerce Department reported yesterday.

Although the increase in spending appeared modest — at 0.1 percent for both April and May — taking into account an unusual decline in consumer prices during the period, spending increased by 0.3 percent each month.

The spending gains were accompanied by big jumps in consumer confidence during April and May, and those gains were largely preserved this month, according to a University of Michigan consumer-sentiment index released yesterday.

“The momentum in consumer spending appears to be picking up,” said Jayanth Nazareth, an economist at J.P. Morgan Chase Bank. That’s “adding to the evidence that economic growth is poised to rebound in the second half of the year.”

Thanks to this spring’s decline in prices, a solid 0.3 percent rise in incomes last month resulted in an even larger increase in purchasing power of 0.4 percent, the department found. Because spending didn’t rise as much as income, that means consumers have more money socked away to spend in the months ahead.

Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto, noted that the report contained “some encouraging news on the economy, while still raising a warning flag on deflation.”

The price index for personal-consumption expenditures contained in the department’s report is Federal Reserve Chairman Alan Greenspan’s favorite measure of inflation, and he has been warning recently of the dangers of deflation, or falling prices.

The 0.2 percent and 0.1 percent declines in the index recorded in April and May appear to bear out Mr. Greenspan’s concerns. At the same time, they provide a welcome boost in disposable income for consumers.

Most of the price drops were in autos, electronics and other goods. Prices for services such as medical care, movie tickets and education continued to creep ahead, growing by 0.2 percent in May.

This spring’s decline in prices brought the inflation rate in the last year to 1.2 percent, the smallest since October 1965, Commerce said.

Perhaps in part because of the bargains available on many popular items, the consumer-sentiment index declined less than expected this month, to 89.7 from 92.1 in May, the university reported.

Confidence was also bolstered by solid gains in the stock market. The Standard & Poor’s 500 stock index is up by 12 percent this year.

“We have put in a bottom in consumer confidence,” said John Ryding, chief market economist at Bear Stearns & Co., although he added that he does not expect to see confidence go much higher in the months ahead.

Spending on services, which account for more than half of consumer spending, surged by 0.5 percent last month, registering the biggest increase since January. Adjusted for inflation, services spending was up 0.2 percent, however.

Spending on durable goods such as autos, appliances and other expensive items designed to last at least three years fell 0.1 percent in May, adjusted for price changes, after rising 3 percent the prior month. Spending on nondurable goods, such as toothpaste, rose 0.5 percent after falling 0.5 percent.

The improving trend has prompted economists to raise their forecasts for economic growth in the second half of the year to around 3.5 percent, more than doubling the 1.4 percent rise in the first quarter.

“We’re poised for a nice pickup in economic activity,” Treasury Secretary John W. Snow said yesterday, noting that spending will get a big boost from tax refunds and rate reductions scheduled to go into effect Tuesday, as well as from deep interest-rate reductions engineered by the Federal Reserve.

Goldman, Sachs & Co. economists expect the economy to grow at a 4 percent annual pace in the fourth quarter, partly aided by the tax cuts.

• This story is based in part on wire service reports.

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