- The Washington Times - Monday, June 28, 2004

Consumer spending surged 1 percent last month, the most in two years, as a reviving job market bolstered incomes and confidence, the Commerce Department reported yesterday.

Beefier incomes reflected rising wages, which posted a second month of 0.6 percent gains and pushed the increase over the last year to 5.2 percent. But much of the gains this year have been absorbed by a jump in inflation fed by soaring gas prices at the pump, which breached $2 a gallon in May.

Gasoline prices have eased back to $1.92 on average since then, and a further break appears to be on the way, as the early transfer of power in Iraq sent oil prices down a notch to $36.24 a barrel yesterday. Oil is down 14 percent since setting a record of $42.33 on June 1.

“This spring’s surge in gasoline prices has eaten up much of the recent growth in income,” said Mark Vitner, economist at Wachovia Securities. But he said the worst of the energy-fed inflation surge is over, and consumer prices should show “dramatic improvement in the next few weeks.”

The Federal Reserve is expected to move this week to forestall a broadening of inflation.

When inflation is factored in, this spring’s consumer spending spree was not so impressive, with purchases rising by a modest 0.4 percent in May after being flat in April. Disposable incomes, after inflation, were unchanged in May, following a 0.4 percent rise in April, according to the department.

Consumer spending accounts for two-thirds of economic activity. Analysts said the more subdued performance after taking inflation into account means that economic growth in the second quarter is likely to mirror that seen in the first quarter — when escalating energy prices held growth down to 3.9 percent.

The recent easing of energy prices, while modest, has ushered in a revival of consumer spirits in recent weeks. Analysts say workers seem to have stopped focusing on gas prices and have taken notice for the first time of the more than 1 million jobs created this year, with accompanying income gains.

Measures of consumer and investor sentiment published by the University of Michigan and UBS/Gallup poll showed a significant pickup in optimism during June, with people citing greater confidence in their earning power and the economy as their reasons.

The rise in spirits sparked by an improving job market provides a durability to the expansion that was lacking until this spring, and is the reason most analysts remain bullish about the economy.

Mr. Vitner said the growth appears to be settling into “a happy medium” which is “neither too hot nor too cold.” He expects growth to fluctuate around 4 percent this year.

Wall Street markets celebrated yesterday’s plunge in energy prices, spurred by the United States turning over power to a new Iraqi government two days ahead of schedule. But after rising sharply early in the day, major indexes retraced their gains and ended down in part out of concern about the jump in inflation reported yesterday.

Prices consumers paid for goods and services during May surged by 0.5 percent, the most since 1990, after increasing 0.2 percent in April, the department said. Excluding food and energy, prices were up a tamer 0.2 percent for a third month in a row.

“I think these numbers were good, but it’s been scaring the inflation bears just a little,” said Ken Tower, chief market strategist for Schwab’s CyberTrader.

The markets are on edge about inflation because the Fed is expected to increase short-term rates by a quarter-point after a meeting of its rate-setting committee tomorrow.

The Fed has promised it will move rates up gradually, but its campaign to nip inflation in the bud may last for months or even years.

“The Fed must respond to the combination of torrid job creation and a relatively high 5.5 percent” rate of inflation in the last three months, said Richard Yamarone, economist with Argus Research Corp.

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