Consumer Spending Rises as Incomes Grow

WASHINGTON – Consumers spent more freely in March as their incomes grew at the fastest pace in six months, another sign the economy is flourishing.

The Commerce Department reported Monday that consumer spending rose 0.6 percent, an improvement from the 0.2 percent increase registered in February. Consumer spending plays a key role in shaping overall economic activity.

Click here to visit FOXBusiness.com's Economy page.

Incomes, the fuel for future spending, advanced by 0.8 percent in March. That was up from a 0.3 percent increase in February and marked the largest gain since September.

Both the spending and incomes figures were better than economists were expecting. Before the release of the report, they were forecasting spending and income to each rise by 0.4 percent.

The spending and income figures are not adjusted for inflation.

When adjusted for inflation, consumer spending looked more subdued, rising by 0.2 percent in both February and March.

An inflation gauge tied to the consumer spending and income report that is closely watched by the Federal Reserve showed that prices -- excluding energy and food -- went up by 0.3 percent in March, compared with a tiny 0.1 percent increase in February. Over the last 12 months, these "core" prices rose by 2 percent -- considered the upper bound of the Fed's comfort zone for inflation.

The Federal Reserve is expected to boost rates by another quarter percentage point at its next meeting on May 10. That would mark 16th increase since June 2004, when the Fed's rate-raising campaign started.

After May, though, the odds are growing that the Fed may move to the sidelines for awhile to assess how its previous rate increases -- which can take a year or more to work through to work their way through the economy -- are affecting economic activity.

Thus far, the economy is motoring ahead despite higher interest rates and rising energy prices.

For the first quarter, the economy zipped ahead at a 4.8 percent pace, the fastest growth in 2 1/2 years, the government reported last week. A rebound in consumer spending figured prominently in the strong showing.

In the current April-to-June quarter, economic growth is expected to slow to the 3 percent range, which would still be healthy, as consumers moderate their spending.

With income growth outpacing spending growth, Americans' personal savings rates improved. The personal savings rate -- savings as a percentage of after-tax income -- rose to negative 0.3 percent in March, compared with negative 0.6 percent in February.

Economists, however, caution against reading too much into the savings rate. They say it doesn't provide a complete picture of household's finances because it doesn't capture gains from such things as real estate or financial investments.

Click here to visit FOXBusiness.com's Economy page.