U.s. Consumer Spending Makes Slow Start

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http://uk.reuters.com/article/2011/02/28/uk-usa-economy-idUKTRE71R68C20110228

U.S. consumer spending barely edged up in January as households took advantage of tax cuts to rebuild their savings, suggesting spending would offer only a modest lift to the recovery in the first quarter.

Other data on Monday painted a bullish picture of the manufacturing sector, with a gauge of factory activity in the country's Midwest hitting a 22-1/2 year high this month, which should help the economy weather rising oil prices and maintain its steady growth momentum.

The Commerce Department said spending rose 0.2 percent, the smallest increase in seven straight months of gains, after an upwardly revised 0.5 percent increase in December.

"The data shows that the manufacturing side continues to be extremely solid," said Omair Sharif, an economist at RBS in Stamford, Connecticut. In contrast, he said, consumer spending would be "only a modest driver of growth this year.

"We are going to improve as the year goes, but it's going to be a gradual uptick," he said.

New York Federal Reserve Bank President William Dudley, speaking in New York, cautioned against withdrawing support for the economy too soon.

Fed Chairman Ben Bernanke testifies before Congress on Tuesday and Wednesday and is likely to echo Dudley's comments. Some Fed officials have said the central bank should consider paring its $600 billion (368 billion pounds) bond buying program aimed at keeping interest rates low and bolstering the economy.

FEELING THE PINCH

Consumer spending -- which accounts for 70 percent of U.S. economic activity -- rose at a robust 4.1 percent rate in the fourth quarter, making up the bulk of the economy's 2.8 percent annualized growth pace.

But the rising cost of gasoline and food has begun to eat into household budgets. The spending report showed consumer inflation rose at a relatively brisk 0.3 percent last month.

Taking the higher prices into account, spending actually fell 0.1 percent, the first decline in a year. That prompted some economists to downgrade their spending growth forecasts for the first quarter to as low as a 2 percent rate.

So the US consumer is starting to feel the pinch, this recovery is well and truly locked in.

Viva recovery.