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Spokane, Washington  Est. May 19, 1883

Slow pay gains soften U.S. spending

Consumers appear to be growing more cautious

Martin Crutsinger Associated Press

WASHINGTON – Americans increased their spending more slowly in March, a sign that scant pay increases may be causing consumers to become more cautious.

Their spending rose 0.3 percent last month, just one-third the increase in February.

Slow wage growth and softer consumer spending gains are the latest evidence that the economy might be weakening after a strong first two months.

Economists say a warm winter made the economy look better because it caused some activity that normally occurs in spring – from hiring to home sales – to occur in January and February. That made March’s gain smaller.

A more troubling factor in the long run is that Americans are receiving little or no pay raises. “Real” income – income adjusted for inflation – has been growing too slowly to sustain healthy increases in consumer spending, many economists say.

After-tax income rose just 0.6 percent in the first three months of 2012 compared with a year earlier. That was the smallest gain in two years.

“Real incomes will need to grow at a faster rate to prevent consumption growth from slowing,” said Paul Dales, senior U.S. economist at Capital Economics.

Before the Great Recession, a healthy gain in consumer spending was between 5 percent and 6 percent a year. March’s increase was roughly half that pace.

And if income, adjusted for inflation, continued to grow at March’s rate, the annual growth would be roughly 2.5 percent. While that’s better than a decline, economists consider it a weak figure. The U.S. economy depends on consumer spending for roughly 70 percent of activity. Many people have been increasing their spending by saving less.

For the full January-March quarter, consumer spending rose at an annual rate of 2.9 percent, the fastest pace in more than a year. The increase was a bright spot in an otherwise sluggish quarter. Dales noted that spending in January and February drove the quarterly increase.

Without better pay, that trend isn’t sustainable. The savings rate edged up to 3.8 percent in March, after dropping to a 30-month low of 3.7 percent of after-tax income in February.

And income, adjusted for inflation, inched up just 0.2 percent after declining for two straight months.