No wages inflation? Productivity outpace wages? Dollar way out of line with price of goods?
U.S. April Personal Income Rose 0.5 Percent, Setting
Stage for More Growth
By Vincent Del Giudice and Michael McKee
U.S. Economy: Rise in April Incomes Points to Growth (Update4)
(Adds closing stocks in 6th paragraph; bond market closed
early for Memorial Day holiday.)
Washington, May 28 (Bloomberg) -- U.S. consumers' incomes
grew at a faster pace in April than a month earlier, suggesting
the spending that has powered the nation's longest peacetime
expansion will continue in the months ahead.
Americans' personal incomes rose 0.5 percent last month,
topping March's 0.3 percent increase, Commerce Department figures
showed today. Spending rose 0.4 percent in April, close to the
previous month's 0.5 percent rise.
''People spend according to what their paycheck looks
like,'' said Joel Naroff, president of Naroff Economic Advisors
in Holland, Pennsylvania. ''And people's paychecks are continuing
to rise solidly.''
The report suggests Americans' purchases of goods and
services aren't slowing much in the second quarter after
accelerating in the first quarter at the fastest pace in 11
years.
If spending doesn't slow, the odds increase that Federal
Reserve policy-makers will raise the overnight bank loan rate to
cool the economy -- especially since a surge in gasoline prices
helped boost an inflation gauge tied to the April income and
spending report by the largest monthly amount in almost 10 years,
analysts said.
U.S. stocks rose after the income and spending report, and a
separate survey from Chicago purchasing managers that showed
manufacturing in the Chicago area didn't expand as much as
expected this month. The Dow Jones Industrial Average rose 92.81
points, or 0.89 percent, to close at 10559.74. The Nasdaq
Composite Index climbed 51 points or 2.1 percent. The Standard &
Poor's 500 Index advanced 20 points or 1.6 percent.
The benchmark 30-year Treasury bond rose 1/4 point, pushing
down its yield 2 basis points to 5.83 percent in abbreviated
holiday trading.
Confident Consumers
The economy grew at a 4.1 percent annual rate in the first
quarter, led by a 6.8 percent annualized gain in consumer
spending, the largest since the first quarter of 1988.
Consumers are reaping the benefits of unemployment close to
a three-decade low and historically low inflation and borrowing
costs. ''It's a party,'' said Richard Yamarone, an economist at
Argus Research Corp. in New York. ''Confidence is high.''
The University of Michigan said today its final index of
consumer sentiment for May rose to 106.8 from 104.6 in April. The
index measuring expectations for future economic growth also rose
to 97.6 from 97.4, suggesting consumers will continue their free-
spending ways.
Backing up that point, the Commerce Department said the
formula it uses to calculate the savings rate showed that it was
a minus 0.7 percent in April, the lowest on record and the same
as the two prior months.
Fed Chairman Alan Greenspan pointed in a Monday speech to
higher stock values and home sales as helping fuel the surge in
consumer spending -- and encouraging people to spend more than
they earn.
''People don't perceive the savings rate as negative,'' he
said. ''As far as they're concerned, they're saving quite
adequately.'' However, a large part of that is accumulated -- but
unrealized gains -- in their stock holdings, he said. ''They're
looking at their 401(k)s.''
Wages Rising
Today's report also showed that wages rose 0.6 percent in
April following a 0.2 percent March increase. Wages in
manufacturing, mining and agriculture rose 0.4 following a 0.1
percent gain a month earlier. Dividend income rose 0.5 percent in
April after a 0.4 percent March increase.
Disposable income, or the money left over after taxes,
increased 0.5 percent in April after rising 0.4 percent a month
earlier.
Spending on big-ticket durable goods, such as automobiles,
fell 0.8 percent in April. Analysts said that probably reflects
only a temporary slowing of purchases of new autos. Spending on
services rose 0.7 percent last month, while spending on non-
durable goods rose 0.4 percent.
April's spending increase was constrained in inflation-
adjusted terms by a surge in gasoline prices. The implicit price
deflator, a gauge of inflation tied to the income and spending
report, rose 0.5 percent in April, ''primarily reflecting a sharp
increase in gasoline prices,'' the Commerce Department said. In
March the deflator was unchanged. Prices also rose for durable
goods for the first time in a year.
Inflation-Adjusted Decline
As a result, spending fell 0.1 percent in April in inflation-
adjusted terms after rising 0.5 percent in March and 0.8 percent
in February.
While it was the first monthly decline since last July in
real terms, ''It does not mark the start of a serious weakening
in consumption because consumers are too happy and too rich to
stop spending anytime soon,'' said Ian Shepherdson, chief U.S.
economist at High Frequency Economics Ltd. in Valhalla, New York.
In addition, oil prices have been falling this month,
lessening the chances of a repeat of the inflation shock from
higher gasoline prices in April. Crude oil futures on the New
York Mercantile exchange have fallen to below $17 a barrel from a
high of $18.69 a barrel May 5.
Stepping Up Production
Much of Americans' spending splurge in recent months has
been for new automobiles, pickup trucks, and sport utility
vehicles.
General Motors Corp., the world's largest auto manufacturer,
earlier this month increased its second-quarter production for
the second time in a month, saying it will build 1.7 percent more
cars and trucks than planned to meet increased U.S. demand. Ford
Motor Co. boosted its second-quarter production last month.
Sales of previously owned homes also ran close to an all-
time high in April. Resales dipped 3.3 percent last month to a
still robust annual rate of 5.24 million -- after advancing 5.4
percent to a record rate of 5.42 million in March, according to
the National Association of Realtors.
The Fed chairman indicated central bankers are now keeping a
close eye on the impact of the average capital gain of about
$30,000 for each home sold.
''When you sell a home, you've basically run your mortgage
down quite significantly,'' he said. ''The buyer is taking out a
regular mortgage and the monies that are shifted to you reflect
not only your original purchase price but your capital gain. And
that capital gain is not encumbered; it's real money available
for real purchases.''
With sales topping a 5 million annual rate in recent months,
''you're talking about a very big number,'' Greenspan said.
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