Economic Conditions

U.S. Economy Picking Up Steam After Weak First Quarter

U.S. Economy Picking Up Steam After Weak First Quarter
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The number of Americans filing new claims for jobless benefits tumbled to a 15-year low last week and consumer spending rose in March, signs the economy was regaining momentum after stumbling badly in the first quarter.

The economic outlook was brightened further by another report on Thursday showing a solid increase in wages in the first quarter, which should keep the Federal Reserve on track to raise interest rates this year.

"This morning's reports all point to an economy that is doing a lot better than the near-stagnation in first-quarter GDP suggests," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Initial claims for state unemployment benefits fell 34,000 to a seasonally adjusted 262,000 for the week ended April 25, the lowest reading since April 2000, the Labor Department said.

Though the decline, which far exceeded Wall Street's expectations for a drop to 290,000, likely exaggerates the labor market's health, it bolstered views that March's sharp moderation in job growth was probably an aberration.

Separately, the Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4 percent last month as households stepped up purchases of big-ticket items like automobiles.

The increase followed a 0.2 percent gain in February and indicated that consumer spending picked up momentum at the end of the first quarter, which bodes well for consumption in the April-June period.

While that should boost growth in the second quarter, the rebound in economic activity could be crimped by an inventory overhang, a strong dollar and ongoing spending cuts in the energy sector, which has been hit by lower oil prices.

Another report showed that factory activity in the Midwest accelerated in April, pushing further away from a 5-1/2-year low hit in February.

The Institute for Supply Management-Chicago's business barometer rose to 52.3 from a March reading of 46.3. A reading above 50 indicates an expansion in the region's factory sector.

Stocks on Wall Street fell despite the fairly upbeat economic data, as Colgate-Palmolive cut its full-year profit forecast for the second time because of the buoyant dollar.

Sentiment was also hurt as ConocoPhillips, the largest independent U.S. energy company, reported that its first-quarter profit fell to $272 million from $2.1 billion a year earlier due to lower crude prices.

Prices for U.S. government debt fell, with the yield on benchmark 10-year Treasury notes touching near a seven-week high. The dollar slipped against a basket of currencies.

Wages Accelerating

When adjusted for inflation, consumer spending rose 0.3 percent in March after being flat in the prior month.

The economy slowed to a crawl in the first quarter as it struggled with severe winter weather, a now-settled labor dispute at normally busy West Coast ports, the strong dollar and lower energy prices, which have cut into domestic oil production.

The Fed on Wednesday acknowledged the first quarter's sharp growth moderation, but dismissed it as partly the result of transitory factors.

Spending last month picked up despite personal income being flat. But the income weakness will likely prove temporary as the labor market gradually tightens.

In a fourth report, the Labor Department said the Employment Cost Index, the broadest measure of labor costs, advanced 0.7 percent after a 0.5 percent rise in the fourth quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack.

In the 12 months through March, labor costs jumped 2.6 percent, the largest rise since the fourth quarter of 2008. They are approaching the 3 percent threshold that economists say is needed to bring inflation closer to the Fed's 2 percent target.

Private sector wages and salaries increased 0.7 percent after gaining 0.5 percent in the prior quarter. They rose 2.8 percent in the 12 months through March, the biggest gain since the third quarter of 2008.

"The conditions seem to be in place for labor costs to start breaking out on the upside, and that would be enough to provide the Fed with the confidence that the inflation target will be reached," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

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