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Consumer spending dip shows economy still fragile

WASHINGTON – Americans spent less than expected in March, pulling back after a burst of buying in the first two months of the year.

The reversal was tied to a larger-than-anticipated decline in income and is a stark reminder of a fragile economy trying to rise out of a deep recession.

The Commerce Department data released Thursday highlighted one of the big wild cards for the economy: consumers’ appetite to spend in the months ahead.

The outcome will be determined in part by how much the tax rebates in President Barack Obama’s economic stimulus package and historically low mortgage rates mitigate the financial pain caused by rising unemployment and falling home values.

Consumer spending fell 0.2 percent in March, ending an otherwise strong quarter for spending on a sour note. Americans’ incomes — the fuel for future spending — tumbled 0.3 percent for the month, reflecting wage cuts and layoffs as employers cut costs. Both the income and spending figures were weaker than economists had expected.

“Consumption fell in March, but let’s not panic a whole lot,” said Joel Naroff, president of Naroff Economic Advisors. “The modest drop off in spending does not change the fact that individuals are starting to buy more things and are attempting to live their lives a little more normally.”

Consumer spending grew at an annualized rate of 2.2 percent in the first quarter, the government said Wednesday in reporting on the nation’s gross domestic product. (Thursday’s spending figure was included in the GDP estimate.)

The first-quarter rebound came after consumers had gone into a deep hibernation at the end of 2008, slashing spending by the most in 28 years. Many analysts say the worst of the recession is over in terms of lost economic growth, but caution pain in the labor market and elsewhere will persist well into next year or longer.

The revival in consumer spending in the first quarter was overwhelmed by big cutbacks by businesses, causing the economy to contract by a sharp 6.1 percent.

On Wall Street, the Dow Jones industrial average gave up earlier gains after Obama confirmed that Chrysler LLC was filing for bankruptcy protection. The Dow, which had been up more than 110 points earlier in the day, lost nearly 18 points to close at 8,168.12.

Christina Romer, chair of Obama’s Council of Economic Advisers, predicted another economic contraction in the second quarter albeit at a slower pace and delivered a downbeat assessment about unemployment. “The recovery will almost surely take a long time,” she said.

Analysts are hopeful the recession is easing its firm hold in the April-June quarter.

They predict the economy won’t contract nearly as much — anywhere from a 1 to 3 percent pace. They expect the improvement will come from less severe cutbacks by businesses and a rebound in government spending.

“Business spending will be down but not as fast and furious as it has been,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

Consumers, meanwhile, are likely to show far less energy than they did in the first quarter. Some analysts expect a small gain in spending, while others think it will be flat.

What is not expected: the “horrors again” of the type of deep consumer spending cuts seen in the final quarter of last year, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

As consumers cut back in March, the personal savings rate rose to 4.2 percent, from 4 percent in February. It stood at 4.4 percent in January, the first time in more than a decade the rate has been above 4 percent for three straight months.

Procter & Gamble Co., the world’s largest consumer products maker, on Thursday reported a dip in its quarterly profit and trimmed its full-year outlook, expecting slow sales through June. P&G has been promoting Tide detergent, Pampers diapers and its other products by emphasizing their value to consumers and cutting costs, but sales fell across its broad portfolio.

In one encouraging sign, the number of newly laid off workers filing for jobless benefits dropped last week.

The Labor Department reported that new applications for unemployment insurance fell to a seasonally adjusted 631,000, from 645,000. Economists had expected a small increase.

The four-week moving average of initial jobless claims, which smooths out volatility, dropped last week to 637,250. That was the lowest level since late February and a decrease of about 20,000 from the high in early April. Goldman Sachs economists have said a decline of 30,000 to 40,000 in the four-week average is needed to signal a peak.

Still, the number of people continuing to draw unemployment benefits jumped to more than 6.27 million, the highest on records dating back to 1967. That was steeper than economists expected and a 13th straight record-high. It suggested that many laid-off workers are having trouble finding new jobs.

As a proportion of the work force, the total jobless benefit rolls are the highest since late December 1982. The continuing claims data lag initial claims data by a week.

Besides the continued claims, the report said there were 2.4 million people receiving benefits, as of April 11, under an extended unemployment compensation program enacted by Congress last year. That provides an additional 20 to 33 weeks on top of the 26 weeks typically provided by states.

Another report showed that the recession is making employers more frugal when it comes to workers’ compensation packages. U.S. workers’ wages and benefits inched up just 0.3 percent in the first quarter of this year, the smallest gain on records dating back to 1982.

Workers and companies have been hard hit by the recession, which began in December 2007. It has snatched 5.1 million jobs and pushed the unemployment rate to a quarter-century high of 8.5 percent. It is expected to top 10 percent by early next year before it starts to slowly drift downward.

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