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The Honolulu Advertiser
Posted on: Friday, May 2, 2008

We spent more because prices are up

By Martin Crutsinger
Associated Press Economics Writer

Hawaii news photo - The Honolulu Advertiser
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WASHINGTON — Don't be fooled by a larger-than-expected increase in consumer spending. People aren't buying more — they're just paying more for their purchases, raising doubts about whether the 130 million stimulus payments the government began sending out this week will be enough to lift consumers' sagging spirits.

The Commerce Department reported yesterday that consumer spending was up 0.4 percent, double the increase forecast. However, once inflation was removed, spending was up only 0.1 percent.

The March reading was the fourth straight lackluster performance and did nothing to alleviate worries that consumer spending, which accounts for two-thirds of total economic activity, remains under severe strains, reflecting an economy beset by multiple problems.

Rising food costs, soaring energy prices and falling unemployment have pushed consumer confidence to the lowest levels in five years. Incomes in March rose a weak 0.3 but after removing inflation, after-tax incomes were flat.

The Bush administration is counting on its $168 billion stimulus program to give the economy enough of a lift to keep the country from slipping into a full-blown recession, but economists are worried that the boost could well be fleeting.

"Consumers are facing bad news on all fronts," said Nigel Gault, chief U.S. economist at Global Insight. "Any burst of spending based on the stimulus payments is likely to prove short-lived."

Sal Guatieri, economist at BMO Capital Markets, said economic growth could still turn negative this quarter even with the rebates. He cited a recent Associated Press-Ipsos poll that found only 19 percent of people plan to spend their rebates, with others surveyed preferring instead to use the $600 to $1,200 checks for the typical family to pay off bills or boost savings.

Guatieri said he expected the rebate checks to be a "moderate tonic," but he cautioned that once the rebates are spent, growth could turn negative later this year.

The government reported Wednesday that the overall economy, as measured by the gross domestic product, grew a weak 0.6 percent in the first three months of this year. Much of the drag in the first quarter came from a tiny 1 percent growth in consumer spending, the weakest increase since the economy was last in recession in 2001.

Some analysts are worried that the GDP could turn negative this quarter if there is a significant cutback on production by businesses trying to work off excess inventories and unemployment continues to increase.

The Labor Department reported yesterday that jobless claims jumped by 35,000 last week to total 380,000 with the number of people receiving benefit checks rising to 3.02 million, the first time that figure has surpassed 3 million in four years.

The department will release the unemployment figure for April today. Economists expect it will show the jobless rate rising to 5.2 percent, up from 5.1 percent in March, with the economy shedding jobs for a fourth straight month.