US Growth Outlook Buoyed by Strong Consumer Spending, Factory Data

US consumer spending recorded its largest gain in more than four and a half years in March and factory activity accelerated last month, reinforcing views the economy was regaining steam.

Economic growth stalled in the first quarter after a very cold and disruptive winter, but the data so far point to a strong second-quarter rebound.

"The weakness in growth we saw in the first quarter is not indicative of what is going on in the economy. The fundamentals continue to look pretty good, the economy has momentum," said Gus Faucher, senior economist at PNC Financial Services Group.

Consumer spending increased 0.9 per cent in March after rising by 0.5 per cent in February, the Commerce Department said.

March's gain was the biggest since August 2009 and beat economists' expectations for a 0.6 per cent rise.

Consumer spending accounts for more than two-thirds of US economic activity. When adjusted for inflation, it increased 0.7 per cent in March after advancing 0.4 per cent in February.

That was also the largest gain since August 2009 and put consumer spending on a strong upward trajectory heading into the second quarter.

In an early sign of growing consumer spending, four of the top six automakers, including Chrysler Group LLC, Toyota Motor Corp and Nissan Motor Co, reported year-to-year gains in sales on Thursday.

"It provides a very strong hand-off to second-quarter spending and also reinforces our expectation for a 3.5 per cent or better second-quarter growth performance," said Millan Mulraine, deputy chief economist at TD Securities in New York.

In a separate report, the Institute for Supply Management said its index of national factory activity rose to 54.9 last month, up from 53.7 in March. A reading above 50 indicates expansion in the nation's factories.

Manufacturing activity has now accelerated for three consecutive months and last month's gains were driven by a pickup in employment, export orders and inventories. New orders, however, were unchanged.

Data so far, including employment and industrial production, suggest there was momentum in the economy at the tail end of a difficult first quarter, providing a springboard for faster growth in the April-June period.

The economy grew at an annual rate of only 0.1 per cent in the first three months of the year. Economists and Federal Reserve officials, however, pinned the slowdown on the impact of a brutal winter. A moderation in the pace of restocking by businesses, which is likely temporary, also weighed on growth.

There is, however, a risk that first-quarter growth could be lowered to show a contraction after a report from the Commerce Department showed an unexpectedly smaller rebound in construction spending in March.

Claims volatile

While another report from the Labor Department showed an unexpected rise in the number of Americans filing for unemployment benefits last week, the overall trend in initial claims continued to point to improving labor market conditions.

Initial claims for state unemployment benefits increased 14,000 to a seasonally adjusted 344,000. Economists had expected a decline to 319,000. The four-week moving average for new claims rose only 3,000 to 320,000.

Claims are volatile around this time of the year because the timing of the Easter and Passover holidays and school spring breaks makes it difficult to adjust for seasonal fluctuations.

"The broader labor market picture has not changed materially and we are expecting another firm employment print in April," said Bricklin Dwyer, an economist at BNP Paribas in New York.

The government is expected to report on Friday that non-farm payrolls increased by 210,000 last month after rising by 192,000 in March, according to a Reuters survey. The jobless rate is forecast falling one-tenth of a percentage point to 6.6 per cent.

In March, consumer spending was buoyed by a 1.4 per cent surge in goods purchases. Spending on durable goods rose 2.7 per cent, the largest increase since March 2010. Spending on services also increased a solid 0.7 per cent, reflecting increased demand for utilities and healthcare services.

Income increased 0.5 per cent in March, the biggest gain since August 2013, after rising 0.4 per cent in February.

Income continues to be supported by government subsidies for healthcare payments. With spending outpacing income growth, the saving rate, which is the percentage of disposable income households are socking away, hit a 14-month low.

Despite the rise in consumer spending, inflation was benign. A price index for consumer spending rose 0.2 per cent in March after rising 0.1 in February. It was up 1.1 per cent from a year ago, compared to a 0.9 per cent year-on-year advance in February.

Excluding food and energy, prices also rose 0.2 per cent after gaining 0.1 per cent in February. They were up 1.2 per cent from a year ago in March, compared to a 1.1 per cent year-on-year rise in February.

Both measures remain stuck well below the US central bank's 2 per cent inflation target, giving the central bank room to keep benchmark interest rates near zero for a while. The Fed plans to wrap up a bond-buying program later this year, but it is not expected to move rates higher until sometime in 2015.