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Weak spending, flat wages may dampen recovery

Consumers spent more in April but much of the increase was eaten up by higher food and energy prices.
/ Source: staff and news service reports

Here's a recipe that does not a strong recovery make: wages are stagnant, Americans are spending more of their hard-earning money on basics like food and fuel and housing can't seem to rev up.

Consumers spent more in April, the Commerce Department said on Friday, but after discounting for higher food and fuel prices, spending barely budged and after-tax incomes were flat for a second straight month.

Meanwhile, pending sales of homes tumbled far more than expected in April to a seven-month low. The National Association of Realtors Pending Home Sales Index dropped 11.6 percent to 81.9 in April, the lowest since September. Pending home sales lead existing home sales by a month or two. Economists polled by Reuters had expected pending home sales to fall 1.0 percent.

Consumer spending rose 0.4 percent, reflecting a surge in the category that covers food and gasoline, areas which showed big price gains last month. Excluding price changes, spending rose a much smaller 0.1 percent. Incomes rose 0.4 percent but after-tax incomes adjusted for inflation were flat for a second straight month.

Analysts are worried that weak income growth and big gains in gasoline and food prices are leaving consumers with little left to spend on other products. That could dampen economic growth. Consumer spending is closely watched because it accounts for 70 percent of economic activity.

Paul Dales, senior U.S. economist at Capital Economics, said that the income and spending data in April painted a "weak picture" of household finances.

"Unless incomes rebound sharply, something we believe is unlikely, real consumption growth will remain subdued," he said.

Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent last month after a previously reported 0.6 percent rise in March.

The report suggested consumer spending maintained its weaker tone into the second quarter as high gasoline and food prices continue to stretch household finances.

In contrast, consumers are beginning to feel more upbeat about the longer-term outlook for the economy, even though they are not so optimistic about income growth, according to the Thomson/Reuters of Michigan survey.

"Sagging real incomes have made consumers more cautious spenders, with rising gas prices especially troublesome for younger and lower income households," Richard Curtin, director of the survey, said in a statement.

"The data continue to indicate the maintenance of a moderate pace of consumer spending during the balance of 2011."

Consumer spending rose at a 2.2 percent rate in the first quarter, the Commerce Department said, braking sharply from a 4 percent pace in the October-December period.

But a recent cooling in gasoline prices could ease some of the pressure on households and boost spending in the months ahead.

High food and energy prices in April kept inflation pressures simmering, with the personal consumption expenditures price (PCE) index rising 0.3 percent after advancing 0.4 percent in March.

Compared to April last year, the index was up 2.2 percent, the biggest rise in a year, after increasing 1.8 percent in March.

The core PCE index, excluding food and energy, increased 0.2 percent after rising 0.1 percent in March.

The core index, which is closely watched by Federal Reserve officials, increased 1.0 percent in the 12 months through April , the largest gain since September. The index rose 0.9 percent year-on-year in March and the Fed would like to see it close to 2 percent.

Incomes rose 0.4 percent last month, in line with expectations. Incomes gained 0.4 percent in March. Disposable incomes adjusted for inflation were flat and savings fell to an annual rate of $570.6 billion, the lowest since August 2009, from $576.7 billion in March.