Tax rebates fail to spark consumer spending

U.S. personal spending slowed in April after record fuel costs, a slump in home values and a deteriorating job market hammered consumer confidence.

The 0.2 percent gain in spending followed a 0.4 percent increase in March, the Commerce Department said today in Washington. Incomes grew 0.2 percent, bolstered in part by the government's tax rebates. Separate reports showed business activity dropped for a fourth month in May and consumer sentiment decreased to the lowest level since 1980.

Retailing stocks slumped after the figures reinforced forecasts for spending growth to slow this quarter to the weakest pace since 1991. J.Crew Group Inc., the casual-clothing retailer, reduced its earnings forecast late yesterday, citing a nationwide drop in the number of shoppers visiting its stores.

"Consumers are spending cautiously," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who correctly forecast the gain in spending. "The economy is in a grey area between recession and slow growth."

Treasuries rallied, sending benchmark 10-year note yields down to 4.03 percent at 9:55 a.m. in New York, from 4.08 percent late yesterday. The Standard & Poor's 500 retailing index dropped 0.8 percent to 401.27.

The Federal Reserve's preferred measure of inflation, which excludes food and fuel costs, slowed in April, today's Commerce report showed. The gauge rose 0.1 percent, compared with a 0.2 percent increase the previous month.

The Reuters/University of Michigan final index of consumer sentiment decreased to 59.8, the lowest level since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007.

Deteriorating confidence indicates that government tax rebates may only provide a temporary boost to economic growth in coming months. Economists forecast consumer spending gains will slow to a 0.5 percent annual pace this quarter, the weakest since 1991, from a 1 percent pace in the first three months of the year.

"Consumers are really very downbeat," Richard Iley, senior economist at BNP Paribas SA in New York, said in an interview with Bloomberg Television.

Economists forecast spending would rise 0.2 percent, according to the median of 73 estimates in a Bloomberg News survey.

Incomes were forecast to rise 0.1 percent, according to the survey. The increase masked the first drop in employee compensation since April 2007.

The central bankers' preferred gauge of prices was up 2.1 percent from April 2007, matching the 12-month increase in March.

Adjusted for inflation, the figures used in calculated gross domestic product, spending was unchanged after a 0.1 percent gain the prior month, the report showed.

Disposable income, or the money left over after taxes, increased 0.2 percent, after increasing 0.3 percent the previous month.

The economy grew at a 0.9 percent annual rate in the first quarter, more than previously estimated, as the trade deficit shrank to a five-year low, revised Commerce figures showed yesterday. Consumer spending rose at a 1 percent pace last quarter, the smallest gain since the 2001 recession.

The surge in food and fuel expenses is causing Americans to become more budget conscious. Wyndham Worldwide Corp., the franchiser of Ramada and Super 8 hotels, said customers are taking advantage of discounts.

"People are probably wary of the economy, wary of food and gas prices being higher, and looking to economize," Chief Executive Officer Stephen Holmes said in a Bloomberg Television interview last week.

Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, dropped 0.2 percent after decreasing 1.3 percent. Purchases of non-durable goods fell 0.2 percent after increasing 0.5 percent.

Spending on services, which account for almost 60 percent of all outlays, increased 0.1 percent for the second month.

The government is counting on its economic stimulus initiative to revive growth. The Treasury last week said it sent $4.9 billion in tax rebates in the fourth week of the program, raising the total distributed so far to $45.7 billion.

The extra money may not bring much relief. Households will spend about $90 billion more this year on gasoline if fuel prices remain at current levels, according to a forecast by economists at Credit Suisse Holdings in New York. That will consume about 80 percent of the more than $110 billion in rebate checks being sent.

Tiffany & Co., the world's second-largest luxury-jewelry retailer, today forecast full-year earnings that may beat analysts' estimates on a surge in jewelry sales abroad and foreign-tourist spending in the U.S.

First-quarter sales at U.S. stores open at least 12 months were unchanged from a year earlier, with a 4 percent decline at its locations outside the main store in New York. Chief Executive Officer Michael Kowalski said in a statement that conditions were "challenging" in the U.S. and that he didn't expect an improvement until later this year.

Other companies, while seeing no indication of a rebound in spending, are also not seeing any further deterioration.

Estee Lauder Cos., the maker of Clinique and Bobbi Brown cosmetics, said its full-year earnings will be higher than it estimated in February.

"We see no indication at the moment that consumer spending is improving, but we don't see anything that it's getting worse," Chief Executive Officer William Lauder said in a May 6 phone interview.

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