Incomes, Spending Rise;Prices Also Creep Higher - 04/29/2005

Slower Growth in Benefits ExpensesHolds Down Costs for U.S. Employers
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
Americans took home bigger paychecks in March, leading to a better-than-expected increase in consumer spending, but savings levels continued to dwindle and inflation picked up some steam.
The Commerce Department reported Friday that personal income increased 0.5% and consumer spending rose 0.6% last month; incomes had risen a revised 0.4% and spending a revised 0.7% in February. Economists surveyed by Dow Jones Newswires and CNBC had forecast personal income would climb 0.4% and spending would gain 0.5%.
But higher prices chewed into the gain in income. An inflation index in the report that is closely monitored by Federal Reserve officials -- the price index for personal consumption expenditures minus food and energy -- rose 1.7% in annual terms. The year-over-year climb in February had been 1.6%. Nonetheless, inflation remained within what many economists view as the Fed's comfort zone of 1% to 2% annual growth.
"There's very little in this report that's too much call for alarm" said John Norris, senior fund manager and economist at Morgan Asset Management, a part of Regions Financial Corp. "I don't think this forces the Fed's hand to do anything other than what they are doing."
Economists expect that the Fed's Open Market Committee will raise its target for the key federal-funds rate by a quarter percentage point to 3% at its next meeting on May 3. That would be the eighth such increase since last June, when the funds rate sat at a 46-year low of 1%. Despite signs that economic growth has cooled -- first-quarter gross domestic product grew 3.1% after posting 3.8% growth in the fourth quarter of 2004 -- policy makers have indicated that they remain focused on keeping prices under control.
A separate report Friday from the Labor Department suggested that compensation costs aren't fanning inflation. The employment-cost index rose 0.7%, the slowest pace in six years, in the first quarter after a 0.8% increase in the fourth quarter. Slower growth in benefits costs helped hold the reading down even as wages and salaries posted slightly higher growth.
In annual terms benefit costs were up 5.9% in the year through March, down from a 6.7% rate over the course of 2004. Many economists attribute the sluggish pace of hiring recently in part to the rapid growth of benefit costs, especially for health insurance.
Mr. Norris said the slowing in benefits expenses reflected the efforts of many employers to pass along higher costs to their employees. "Deductibles and copays are going up," he said, noting that as companies try to add value for shareholders in a competitive global economy, the trend is likely to continue.
The Labor Department's report showed that wages and salaries, which account for about 70% of the employment-cost index, grew at the fastest pace in six months. In year-on-year terms the increase was 2.4%, unchanged from the annual rate in 2004. The Commerce Department report on income and spending showed wages and salaries increased $16.9 billion, after rising $15.6 billion in February. Disposable personal income, or income after taxes, increased 0.5% after a revised 0.4% advance in February.
Commerce's report also showed a continued narrowing in consumers' financial reserves. Personal saving as a percentage of disposable personal income was 0.4% in March, down from 0.5% in February and lower than 0.8% in January. The 0.4% savings rate in March was the weakest performance since a 0.2% decrease in October 2001.
Separately, U.S. consumers' attitudes toward the economy softened in April, according to a report Friday. The University of Michigan's full-month report on consumer sentiment moved to 87.7 in April, down from 92.6 in March, according to people who had seen the report, which is released only to subscribers. The preliminary April reading had been 88.7.
An index for consumer expectations about future economic activity stood at 77.0 after a preliminary reading of 79.0 and March's 82.8. But consumers' assessment of current conditions strengthened slightly, rising to 104.4, compared with 103.9 in the preliminary report. The index was 108.0 in March.
Write to the Online Journal's editors at newseditors@wsj.com