WASHINGTON – Consumers — whose behavior plays a crucial role in shaping economic activity — increased their spending in April by a solid 0.3 percent, a good signal that the recovery remained firmly rooted as it entered the current quarter.
The increase reported by the Commerce Department (search) on Friday came after a brisk 0.5 percent advance in March and suggested that consumers continued to do their part to support the economy.
Americans' incomes, meanwhile, rose by a strong 0.6 percent in April, marking the largest gain since January 2001. The growth in income last month, which followed a 0.4 percent rise in March, was especially encouraging because that is the fuel for spending in the future.
The income and spending figures are not adjusted for price changes.
Consumer spending (search) accounts for roughly two-thirds of all economic activity in the United States. It is a critical factor in shaping the strength of the economy's recovery.
The latest snapshot of consumer activity was slightly better than economists were expecting. They were forecasting spending to go up by 0.2 percent and incomes to grow by 0.5 percent in April.
The economy grew at a healthy 4.4 percent annual rate in the January-to-March quarter of this year, helped out by consumers, who spent at a decent pace.
Looking ahead, some analysts believe higher energy prices could dampen consumer spending, thus slowing the economy a bit in the current April-to-June quarter. Some economists are estimating second-quarter growth to be in the range of a 3.5 percent to 4 percent pace — which would still be a good performance.
Others, however, estimate second-quarter growth will clock in from a 4 percent to 4.5 percent pace. A few believe growth could be as high as a 5 percent pace.
The latest projections, in some cases, were lowered from previous estimates to take into account the impact of higher energy costs and higher long-term interest rates, including those for mortgages, on consumer spending and other economic activity.
In April, consumers increased their spending on "durable" goods — costly manufactured items such as cars and appliances — by 0.8 percent, down a bit from a 1 percent gain in March.
Spending on "nondurables," such as food and clothes, actually dipped in April by 0.1 percent, compared with a 0.9 percent rise the month before. Spending on services, which includes gas and electric utilities, went up by 0.5 percent in April, following a 0.3 percent increase.
With income growth outpacing spending, the nation's personal savings rate —savings as a percentage of after-tax incomes — rose to 2.4 percent in April, the highest rate since last August and up from 2.2 percent in March.
A growing number of economists are predicting the Federal Reserve (search) will raise a key short-term interest rate, now at a 46-year low of 1 percent, when it meets next month. The Fed's main rate has been at an ultra low level since last. With inflation stirring, economists believe it is now time for the central bank to begin to nudge that rate up to make sure inflation doesn't get out of control.