U.S. shopper spending rises most since ’09

0.9% March surge follows stretch of lackluster results

WASHINGTON — U.S. consumer spending surged 0.9% in March, the biggest gain in nearly a decade, as inflation pressures remain nonexistent.

The March gain was the biggest monthly increase since August 2009, the Commerce Department reported Monday. That’s a marked improvement after three months of lackluster readings in this key segment of the economy. Consumer spending accounts for 70% of economic activity.

Incomes grew 0.1% in March while inflation rose just 0.2% and has risen only 1.5% over the past 12 months, far below the Federal Reserve’s 2% target for inflation. Fed policymakers meeting this week are expected to hold interest rates steady.

The big jump in consumer spending is encouraging because it suggests that the overall economy had solid momentum going into the April-June quarter.

The government reported Friday that the economy, as measured by the gross domestic product, grew at a surprisingly strong 3.2%, helped by the March surge in consumer spending. However, economists noted that about half of the first-quarter strength came from a big rise in inventory stocking by businesses and by a sharp narrowing in the trade deficit. Both of those gains were expected to be temporary, and that could subtract from growth in the current quarter.

The 0.9% March jump in spending followed a sharp 0.6% drop in December and tiny gains of 0.3% in January and 0.1% in February. The slight 0.1% rise in incomes in March followed a modest 0.2% rise in February and a 0.1% decline in January.

With the big rise in spending and the small increase in incomes, the household saving rate fell to 6.5% of after-tax income in March, the lowest level since November when it was 6.2%.

The 1.5% year-over-year increase in consumer prices was up from a 1.3% 12-month gain in February but still well below the Fed’s target.

The absence of inflation pressures was a key reason that the Fed did an about-face this year and announced that after increasing its benchmark interest rate four times in 2018, it planned to be “patient” and expected that it would not raise rates in 2019.

That change has helped spur a big rally in the stock market as investors stopped worrying that the Fed was in danger of overdoing its

credit-tightening campaign and might drive the economy into a recession.

Stocks rose Monday with the Dow Jones industrial average climbing 11.06, or less than 0.1%, to 26,554.39. The Standard & Poor’s 500 index rose 3.15 points, or 0.1%, to 2,943.03. The S&P 500 has risen 17.4% this year.

“There’s a lot of things … that appear to be pretty supportive of the stock market,” said Mark Stoeckle, chief executive officer of Adams Funds, which has about $2.5 billion in assets under management. “The Fed pivoted, and trade — at least on the surface — appears to be progressing in the right direction. In addition to that, you see a lot of companies that are reporting some pretty good [quarterly earnings] numbers.”

As Fed Chairman Jerome Powell and his colleagues gather this week for a policymaking meeting, some of them will likely have 1995 on their mind.

That was the year that the Fed initiated a midcourse correction in monetary policy, cutting interest rates after a sustained bout of tightening. Now some officials and investors are beginning to wonder if the Fed will again have to ease its stance after raising rates in 2018.

“I do see some parallels between the 1995-96 period and what we’re currently in,” said David Stockton, who was at the Fed at the time and is now with the Peterson Institute for International Economics. “There’s always some concern that maybe you’ve overdone it” after repeatedly raising rates.

Powell and his colleagues are widely expected to hold rates steady. What Fed watchers will be looking for are any hints in the post-meeting statement — or more likely, Powell’s subsequent news conference — that the central bank is teeing up a rate cut for later in the year.

“I think they stay on hold here for a long time, but there is a risk that lower inflation does push them to think about easing,” said Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York.

President Donald Trump and Larry Kudlow, head of his National Economic Council, have urged the Fed to cut rates. Last week, Trump asserted that annual economic growth would have reached 5% last quarter, instead of 3.2%, had the Fed provided rates as low as the ones that prevailed during President Barack Obama’s administration, when the economy was recovering from the devastating 2008 financial crisis.

According to data tracked by the CME Group, investors foresee zero probability that the Fed will raise rates this year. Their bets indicate a roughly 64% likelihood that the Fed will cut rates before year’s end.

One factor in that dovish view is that the economy might not be quite as robust as the latest economic figures suggest. The first quarter’s healthy 3.2% annual growth rate was pumped up by temporary factors that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation.

“We are still confronting a global slowdown, with 70% of the global economy slowing,” said Diane Swonk, chief economist at Grant Thornton.