Americans had plenty of reasons not to spend: workers’ wages continued to grow at an anemic pace, even as higher prices for food and gasoline pinched pocketbooks, according to a report released Thursday by the Commerce Department.
Spending grew 0.1 percent in March when adjusted for inflation, after staying flat in February and rising slightly in January, the report said. At the end of last year, spending actually declined.
“What you’ve got here is a very dramatic consumer slowdown,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “It’s much more severe than anything we saw in 2001,” he added, referring to the most recent recession.
Unadjusted consumer spending rose 0.4 percent in March, more than expected, but that figure did not take into account the immense price run-up in food and gasoline.
Most of the money that was spent went toward services, including necessities like haircuts and medical care. Sales of big-ticket items like washing machines and television sets declined in March, the report said, a signal that Americans were putting off large-scale purchases, which are commonly bought on credit. In the first quarter, sales of those goods plummeted 6.1 percent.
“It’s very disconcerting,” Mr. Shepherdson said. “About half of all consumption is not really discretionary, it’s things like food, energy, medical costs, over which people have very little control in the short run.”
Part of the problem is that the spending power of many Americans has declined. Incomes rose just 0.3 percent in March, down from a 0.5 percent increase in February. After taxes, and adjusted for inflation, income was flat for the month.
But Americans are being forced to spend more despite their stagnant wages. Inflation, already elevated, accelerated in March, the report said; consumer prices are now 3.2 percent higher than a year ago. For the month, prices were up 0.3 percent in March after rising 0.1 percent in February.
The report does not bode well for the economy’s prospects, specialists said. Consumer spending is the primary engine of the economy, accounting for more than two-thirds of gross domestic product. If those pistons start to slow, the system is likely to sputter to a halt.
A Commerce Department report on the economy’s performance in the first quarter, released Wednesday, showed consumption at its weakest point since the recession of 2001.
Spending is expected to tick up slightly after the government mails out tax rebates in an effort to stimulate the economy. But economists said the rebates were unlikely to prop up sales for long.
“The worry is that after that relief fades away, the consumer will still be faced with the same underlying problems,” Nigel Gault, an economist at Global Insight, a forecasting firm, wrote in a client note. “Any burst of spending based on the stimulus payments is likely to prove short-lived.”
Thursday’s report also provided little comfort to the Federal Reserve, which is trying to avoid a recession while keeping price pressures in check.
The Fed, in determining inflation dangers, is said to keep close track of a figure in the Commerce report that measures prices of goods excluding energy and food products, which are considered volatile from month to month. This figure, known as the core personal consumption expenditures price deflator, rose to 2.1 percent in March, from 2 percent in February, slightly above the Fed’s presumed “comfort zone.”
Separate reports on Thursday revealed problems in the construction and manufacturing sectors, which have been battered in the last year by the housing slump. Residential construction fell sharply in March, shrinking 4.6 percent as builders cut back on groundbreakings or stopped work on projects. Over all, spending on construction declined 1.1 percent in March after rising 0.4 percent in February, the Commerce Department said.
The Institute for Supply Management’s manufacturing index, a bellwether of manufacturing activity, stayed flat in April as companies laid off workers. The index was unchanged at 48.6. Inventories and export orders rose, but new orders flattened.
Wall Street is keeping a close eye on the Labor
Department’s report on April unemployment, which will be
released Friday. Economists predict that employers shed
up to 75,000 jobs last month, a forecast bolstered by a
report on Thursday that new claims for unemployment
benefits rose by 35,000 last week, to 380,000.