Americans’ Buying Binge Shows Little Sign of Letting Up

Americans emptied their piggy banks and shopped relentlessly for cars and other big-ticket items in February, adding to the economic imbalance Federal Reserve Chairman Alan Greenspan is anxious to contain.

Personal spending in February rose a stronger-than-expected 1% in February, after an upwardly revised gain of 0.6% in January, the Commerce Department reported Friday.

The rise in spending, spurred largely by an insatiable appetite for new cars, came despite a more modest rise in incomes and left the savings rate at an all-time low.

Incomes gained 0.4% in February after a 0.7% gain in January, which was boosted by federal pay raises and subsidies.

The data are the latest indication that five interest rate hikes by the Federal Reserve since last June have yet to tame the rapidly growing economy, which is booming thanks to low unemployment, high consumer confidence and increased wealth from stock market and home equity gains.

Economists said the report highlighted the growing imbalance in the U.S. economy as shown by the fact that spending steamed ahead despite a drop of 0.1% in real disposable income, when adjusted for inflation and taxes.

That imbalance, they said, could add to debate at the central bank that it may need to abandon its gradual approach to raising interest rates and opt for a more aggressive rise of 50 basis points when Fed policymakers meet in May.

“Mr. Greenspan and the Fed have staked their policy game plan on the need to close the gap between the growth in spending and the growth in income,” said David Orr, chief economist at First Union.

Friday’s report was not all gloom and doom for the Fed, though. Commerce said prices were well-contained despite the ferocious pace of consumer spending.

The personal consumption expenditures implicit price deflator--Greenspan’s most-favored inflation gauge--rose 0.4% in February after a 0.3% gain in January. That left inflation, as measured by the PCE deflator, at less than the consumer price index.

With spending outpacing income growth, savings amounted to a paltry 0.8% of disposable income, Commerce said. That was down sharply from January’s 1.4% and left personal savings at an all-time low.

Economists fear that if the economy dips into recession, the low savings rate could exacerbate problems because many households would be left without cash to fall back on to help clear mounting debts carrying higher interest rates.

The report was stronger than economists’ robust projections that income would rise 0.3% in February and that consumption would rise 0.8%. The data helped push bond prices initially lower before they gained later in reaction to stock market activity.

A separate report from the Commerce Department showed that U.S. orders for manufactured goods fell 0.8% in February after a decline in January. February’s decline was led by weaker demand for aircraft and parts. Orders for transportation goods fell 8.9%--the largest decline since April.

Excluding transportation, a notoriously volatile component in the factories report, new orders would have risen 0.5% in February.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Richer but Spending It

Personal income rose 0.4% in February. Seasonally adjusted annual rate, in trillions of dollars:

*

February: $8.09 trillion

*

But personal spending rose 1% during the same period. Seasonally adjusted annual rate, in trillions of dollars:

*

February: $6.60 trillion

*

Source: Commerce Department