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Spending Pace Slows As Tax Hikes Bite

Consumers spent more in March without raiding savings accounts, despite a smaller-than-expected bump in income, but the data still point to a slowly growing economy on the verge of stalling.

Spending climbed just 0.2% in March after a 0.7% surge in February, the Commerce Department said Monday. But that was better than forecasts for 0.1%.

Personal income also rose 0.2%, down from 1.1% in the prior month and below expectations for 0.4% growth. And while consumers didn't dip into rainy-day funds, they didn't add much to them either. The savings rate held at a modest 2.7%.

Lower gas prices probably helped households stay out of their savings accounts, said Joel Naroff, president of Naroff Economic Advisors. But that's not a sustainable path to growth.

"I focus on that wage and salary number, and it needs to be a lot higher than that to really get the economy moving," he said.

Wages climbed just 2.5%, the weakest annual nominal gain since June 2010, vs. 2.8% in February. Real after-tax income rose 1.1% annually, a bit better than February but still anemic.

Stocks rallied broadly as Italy moved to resolve a political stalemate that had threatened to worsen its debt picture. U.S. pending home sales were also stronger than estimates.

While March spending topped forecasts, Q1 GDP data released last week indicated much of the increase came from higher heating bills during unseasonably cooler weather.

The New Year payroll tax hike also is weighing on consumer spending, which accounts for about two-thirds of the U.S. economy, said Michael Brown, an economist with Wells Fargo.

"The core strength of the consumer sector has still not shown itself," he told IBD.

But Rob Lutts, president and chief investment officer of Cabot Money Management, thinks Monday's spending numbers are a net positive, with consumers not rolling over and slashing budgets.

Meanwhile, low U.S. energy costs could be a game-changer that drives increased U.S. manufacturing, he argues. And corporations are likely to jump in with long-delayed capital spending.

"This spring could be the time when these corporate executives finally say, 'Let's do this project that's been on the back burner,' and everyone is going to do that all at once," Lutts said.

Signed-contracts for previously owned homes rose 1.5% in March, according to the National Association of Realtors. The growth was more than double estimates, and the level of contracts was the highest since April 2010, when an expiring tax credit spurred a buying rush.

Deals appear to be leveling off on a lack of inventory, NAR said. That's driving up prices, which should eventually lure in more sellers.

Other data this week will further fill out the economic picture, including Friday's April jobs report. Economists expect the unemployment rate to remain at 7.6%, with a 153,000 boost to payrolls.

The Federal Reserve isn't expected to announce any policy change at the end of its two-day meeting Wednesday. But Fed officials could signal less willingness to taper bond buying later this year given the recent trend of weaker data.