Consumer Spending Probably Eased in April: U.S. Economy Preview

May 22, 2011, 12:22 AM EDT By Timothy R. Homan

May 22 (Bloomberg) -- Consumer spending probably cooled in April as higher food and fuel prices forced Americans to cut back on other items, economists said a government report this week will show.

Purchases increased 0.5 percent, the smallest gain in three months, after climbing 0.6 percent in March, according to the median estimate of 66 economists surveyed by Bloomberg News before a May 27 Commerce Department report. Other data may show business investment, the stalwart of the recovery, kept growing.

Manufacturers like Deere & Co. are benefiting from gains in spending on equipment and software, while retailers like Wal- Mart Stores Inc. are reporting slower U.S. sales as households feel the pinch of grocery and energy bills. Chairman Ben S. Bernanke is among Federal Reserve officials who predict the acceleration in commodity prices will be temporary.

“Consumers are allocating more of their dollars toward fuel,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “Manufacturing has been holding up pretty well considering the rise in gasoline prices” and the supply-chain disruptions in Japan, he said.

The Commerce Department report will also show incomes rose 0.4 percent, the seventh straight monthly gain, after a 0.5 percent increase in March, according to the survey median.

Higher prices for necessities like food and energy are weighing on purchases of less essential items. The average cost of a gallon of regular gasoline averaged $3.81 in April after $3.54 the prior month, according to AAA, the nation’s biggest motoring organization.

Less Pressure

Cost pressures have started to wane this month. Prices at the pump peaked at $3.99 on May 4, the highest since July 2008, and declined to $3.89 on May 19.

Sales at U.S. Wal-Mart stores open at least a year dropped 1.1 percent in the first quarter, the eighth decline in a row, the world’s largest retailer said last week. Customers are still struggling with economic uncertainty, buying more generic items rather than their more costly name-brand counterparts, executives said in a May 17 pre-recorded call.

American manufacturers are faring better than consumers as increasing demand from emerging economies like China supplements gains in business spending.

Deere, the world’s largest farm-equipment maker, last week raised its fiscal 2011 earnings forecast and posted second- quarter profit that beat analysts’ estimates amid increasing demand for agriculture and construction equipment.

Equipment Orders

A May 25 Commerce Department report will show that orders for durable goods, excluding volatile transportation bookings, increased 0.5 percent in April after a 2.3 percent jump the prior month. Overall demand fell 2.5 percent, economists said, because of a drop in airplane orders at Boeing Co.

One part of the world’s largest economy that continues to struggle is the housing market, particularly as foreclosures mount. Pending home sales, or contract signings for existing homes, fell 1 percent in April after a 5.1 percent increase the prior month, economists forecast the National Association of Realtors will report on May 27.

Sales of new homes, which account for about 5 percent of the market, were little changed at a 300,000 annual pace in April, according to economists surveyed by Bloomberg ahead of a May 24 report from the Commerce Department. New houses have sold at an average 294,000 rate in the first three months of the year, compared with a record-low 323,000 for all of 2010.

Shares of machinery makers have outpaced homebuilders since the beginning of the year. The Standard & Poor’s Supercomposite Machinery Index has climbed 5.1 percent compared with little change for the S&P Supercomposite Homebuilder Index.

Jobs, Sentiment

Gains in employment and higher stock values are outweighing gas prices when it comes to confidence among Americans, according to data from Thomson Reuters/University of Michigan.

The group’s final sentiment index for May is projected to climb to 72.4, the highest in three months, from 69.8 at the end of April, according to economists surveyed ahead of the May 27 report.

The pace of growth during the first quarter was stronger than previously estimated, economists said figures from the Commerce Department on May 26 will show. The economy expanded at a 2.2 percent rate, up from the 1.8 percent initially estimated, according to the survey median.

The GDP estimate is the second of three for the quarter, with the final release scheduled for June, when more information becomes available.

--With assistance from Chris Middleton in Washington. Editors: Carlos Torres, James Tyson

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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