Hiring likely to boost spending despite gas prices

Consumers as a whole will likely spend more this year. But it's not because we'll all be earning more money. Even people lucky enough to get a raise will likely spend most of the extra dollars to pay higher gas and food prices.

Consumers as a whole will likely spend more this year. But it's not because we'll all be earning more money. Even people lucky enough to get a raise will likely spend most of the extra dollars to pay higher gas and food prices.

Yet employers are hiring more freely this year and more people working means more money being spent to fuel the economy.

"It is hard to spend money without an income. More jobs will be good for consumer spending," said David Wyss, chief economist at Standard & Poor's in New York.

People made more money and spent more money in March, the Commerce Department reported Friday. But after adjusting for inflation, spending rose only 0.2 percent and after-tax incomes were essentially flat.

Consumer spending, which accounts for roughly 70 percent of economic activity, grew at an annual rate of 2.7 percent in the January-March period. That was a sharp decline from the 4 percent growth in the previous quarter.

Less spending led the overall economy to grow at only a 1.8 percent annual rate in the first three months of the year — weaker than the 3.1 percent growth in the October-December quarter of 2010.

Americans were poised to spend more this after Congress agreed to give them a 2 percentage-point cut in Social Security payroll taxes. But a steady rise in gas prices has siphoned away most of that extra money, leaving consumers with less discretionary money to spend on cars and appliances, at restaurants, and to take vacations.

Gas prices are showing few signs of easing. The national average at the pump on Friday was $3.91 a gallon — 32 cents more than what consumers paid at the end of March and a dollar more than what they paid a year ago.

"Consumers have been taking the money from their tax cuts and putting it in their gas tanks to drive to work," said Mark Zandi, chief economist at Moody's Analytics. "The higher gas prices have really sucked the wind out of consumers' purchasing power."

Zandi and other economists are optimistic that gas prices will level off this spring, before dropping in the summer or fall. That would give people more discretionary money and help lift economic growth to more than 3 percent for the rest of 2011, they say.

At the same time, the economy is benefiting from the best two-month hiring stretch in five years. Unemployment dropped to a two-year low of 8.8 percent in March. Economists expect employers will keep adding around 200,000 jobs a month through the end of the year. As more people find jobs, spending will rise.

But the job growth is not expected to give workers' more bargaining power to demand higher wages.

"The unemployment rate is still very high," said Paul Dales, chief U.S. economist at Capital Economics. "You are not going to ask for a pay raise when you know there are a lot of people who could get your job."

As a result, people are saving more than they did before the recession. That's good for household budgets but bad for economic growth. The savings rate remained unchanged at 5.5 percent of after-tax incomes in March, well above the 2.1 percent pace in 2007.

Wyss said he believed the savings rate will remain around where it is now for the rest of the year.

"People were in debt up to their eyeballs when the recession began and they are gradually working their way out of so much debt," Wyss said.

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