June 30, 2005

Flat US spending sign of a soft patch

By Alister Bull

WASHINGTON (Reuters) - High oil prices pinched U.S.consumer spending and business activity in the U.S. Midwest,data on Thursday indicated, but tame inflation reinforcedexpectations the Federal Reserve would raise interest ratesagain.

The U.S. central bank is holding a two-day policy meetingwhich ends on Thursday. Markets expect a ninth straightquarter-percentage-point increase in short-term rates to 3.25percent when the Fed announces its decision, expected soonafter 2:15 p.m. EDT (1815 GMT).

Earlier, a report showed the National Association ofPurchasing Management-Chicago business barometer slipped to53.6 in June from 54.1, meaning that businesses grew a bit lessthan expected. The index, which shows growth if the number isabove 50, was predicted at 54.3.

The report followed weaker-than-forecast U.S. consumerspending in May and mild readings on inflation, although thelatest weekly jobs claims numbers unexpectedly fell -- goodnews for the June employment report next Friday.

"Oil explains both the Chicago PMI and soft consumption,"said Peter Kretzmer, senior economist at Bank of America.

"I saw very little in the consumption numbers to change theidea that we had a modest slowing in the second quarter... TheChicago PMI also indicated that conditions stabilized but wereslightly softer in June," he said.

The Commerce Department said personal income in Mayincreased 0.2 percent, just beneath Wall Street forecasts for a0.3 percent gain. That followed a 0.6 percent advance in Apriland was the weakest reading since January.

Consumer spending was flat, versus forecasts for an advanceof 0.1 percent, after a 0.6 percent increase in April.

The price index for consumer expenditure, a measure ofinflation favored by Fed Chairman Alan Greenspan, was alsounchanged after rising 0.4 percent in April.

"As the economy strengthened, companies got a little morepricing power, but not enough to push inflation upsubstantially," said Gary Thayer, chief economist at A.G.Edwards & Sons in St. Louis. "This number shows that inflationis still contained, which is good news for the Fed."


Investors are on alert for inflation after oil pricesrecently spiked above $60 per barrel.

Stripping out the volatile effect of food and energyprices, the core PCE price index advanced 0.2 percent asexpected after gaining 0.1 percent in April. It now stands 1.6percent higher than May 2004.

Excluding inflation and taxes, real disposable income rose0.1 percent or at the same pace as the previous month, theCommerce Department said.

"The very slight increase in personal income is consistentwith May's soft reading on hiring activity as well as theslight increase of average hourly earnings," said John Lonski,chief economist at Moody's Investors Services.

Employment growth disappointed in May with just 78,000 newjobs created but analysts expect double the number this month.

A decline in the latest jobless claims data also pointedtoward more good news on the labor market front, although theemployment component of the Chicago PMI fell to 48.9 from 54.7in a warning of possible weakness going forward.

The number of Americans seeking initial joblesscompensation unexpectedly fell by 6,000 last week to the lowestlevel in more than two months, the Labor Department said.

First-time claims for state unemployment insurance, anearly reading on the resilience of the job market, fell for thesecond straight week, slipping to 310,000 in the week endedJune 25 from a revised 316,000 in the previous week.

A Labor Department analyst said there were no specialfactors behind the decrease.

The drop in the weekly data defied Wall Street expectationsfor a rise to 325,000 from the original reading of 314,000 inthe week ended June 18.

The closely watched four-week moving average also fell forthe second consecutive week, dropping to 323,500 from 333,750in the previous week. (Additional reporting by Nancy Waitz inWashington and Ros Krasny in Chicago)