Economic Indicators
-Consumer Spending and Home Sales –
February, 2011

Consumer Spending

Economic indicators are important in understanding the state of the U.S. economy, and one which is quite close to the U.S. citizen’s heart, is consumer spending. This has barely edged up in January as households took advantage of tax cuts to rebuild their savings, suggesting spending would offer only a modest lift to the recovery in the first quarter.

Consumer spending -- which accounts for 70 percent of U.S. economic activity -- rose at a robust 4.1 percent rate in the fourth quarter, making up the bulk of the economy's 2.8 percent annualized growth pace.

Taking the higher prices into account, spending actually fell 0.1 percent, the first decline in a year. That prompted some economists, observing this economic indicator, to downgrade their spending growth forecasts for the first quarter to as low as a 2 percent rate.

The report, however, offered little evidence that food and energy costs were sparking a broader rise in inflation.

A core inflation gauge closely watched by the Fed edged up just 0.1 percent. In the 12 months through January, this index rose 0.8 percent, just off a record low.

Tax cuts helped lift incomes by 1.0 percent in January, the largest rise since May 2009, as the government began to withhold less for the Social Security retirement program.

The lower tax withholding was part of an $858 billion tax cut package enacted last year. Economists expect the extra income to cushion consumers against high gasoline prices.

This report reveals that with spending tepid and incomes strong, savings jumped to their highest level since August.



Pending Home Sales Index

Another economic indicator showed the recovery continues to elude the housing sector. The National Association of Realtors Pending Home Sales Index, based on contracts signed in January, fell 2.8 percent. Pending home sales lead existing home sales by a month or two.

The Commerce Department said that this report showed spending rose 0.2 percent, the smallest increase in seven straight months of gains, after an upwardly revised 0.5 percent increase in December.

"We are going to improve as the year goes, but it's goingto be a gradual uptick," said Omair Sharif, an economist at RBS in Stamford, Connecticut.