Consumers spending more on cars, appliances

WASHINGTON -- Consumers are snapping back to life, kindling springtime hopes that the recession is losing steam.

Even though the economy shrank again in the first three months of the year -- and by a lot -- Americans stepped up their purchases of cars, furniture and appliances. The surge in consumer spending, which accounts for about 70 percent of the economy, could set the stage for a rebound later this year.

Hopes for revival depend on those consumers, who have been fortified by fatter paychecks from tax cuts and smaller mortgage payments from refinancings. If they keep buying, businesses will need to boost production, feeding yet more economic activity.

Against that backdrop, many analysts think the economy is sinking less now than it did from January through March. Most believe it could start growing again by summer or, more likely, by the final quarter of this year.

Federal Reserve chairman Ben Bernanke and his colleagues, opting against further action Wednesday to shore up the economy, detected glimmers the recession might be easing.

"The pace of contraction appears to be somewhat slower," Fed policymakers said in a statement a few hours after the government released its report showing a second straight big quarterly drop in the nation's gross domestic product.

On Wall Street, stocks jumped higher. The Dow Jones industrials gained nearly 170 points.

In remarks prepared for the start of his news conference Wednesday night, President Barack Obama praised recent gains but said much was left to do.

"Even as we clear away the wreckage of this recession, I have also said that we cannot go back to an economy that is built on a pile of sand -- on inflated home prices and maxed-out credit cards, on overleveraged banks and outdated regulations that allowed the recklessness of a few to threaten the prosperity of us all," he said.

The American consumer is still a wild card in any recovery scenario.

Though the Federal Reserve noted that spending "has shown signs of stabilizing," it also said people's buying is still constrained by rising unemployment, falling home values and hard-to-get credit.

Those negative forces -- or the emergence of new ones, like the swine flu outbreak -- could cause consumers to do an about-face and ratchet back spending, throwing the economy into another tailspin.

"The economy is definitely not out of the woods yet," said Brian Bethune, economist at IHS Global Insight. But, he added: "The good news ... is that the most severe phase of the recession is behind us."

The economy logged a worse-than-expected 6.1 percent annualized drop in the first three months of the year despite the rebound by consumers, the Commerce Department reported. The culprits behind the poor overall performance: sharp cutbacks by businesses, especially in inventories of unsold goods, and the biggest drop in U.S. exports in 40 years.

The decline was nearly as sharp as in the final three months of last year. That's when the economy shrank at a 6.3 percent pace, the worst showing in a quarter-century. The biggest pullback by consumers in 28 years figured prominently in that downward spiral.

All told, the economy logged its poorest six-month performance since the late 1950s.

The bleak picture underscores the damage caused by the housing, credit and financial crises -- the worst since the 1930s. The recession, which began in December 2007, has battered the national economy and wiped out a net total of 5.1 million jobs.

The economy totaled $11.3 trillion at an annual rate in the first quarter, compared with $11.7 trillion in the second quarter of 2008.

Still, consumers roared back in the first quarter of this year. They boosted their spending at an annual rate of 2.2 percent, the most in two years. Gains in disposable income helped by tax refunds and government benefit checks like Social Security helped allow the spending gains.

Much stronger demand for long-lasting "durable" goods, including cars, furniture and household appliances, led the increase. That spending rose at a 9.4 percent pace, the most in a year.

Consumers also boosted spending on clothing, shoes, recreation services, medical care, gasoline and other energy products. One exception was food, on which spending dipped slightly.

Americans' higher consumption, though, was swamped by deep spending cuts in virtually every other area of the economy.

Businesses cut back on home building, commercial construction, equipment and software, and inventories of goods. Sales of U.S. goods to foreign buyers sank in the face of economic troubles abroad. Even the government trimmed spending. It was the first time that's happened since the end of 2005.

The Federal Reserve cited some of these negative forces in warning that the economy is likely to remain weak for a time. The Fed said it hopes the aggressive action it's taken so far will lead to a gradual resumption of sustainable economic growth -- though it didn't say when.

To brace the economy, the Fed on Wednesday pledged anew to keep its key lending rate at a record low level for an extended period. Economists predict the Fed will keep rates there well into next year.

Even if the recession were to end this year, the economy is likely to remain feeble and unemployment will keep climbing, government officials and analysts say.

The Labor Department on Wednesday said all 372 metropolitan areas that are tracked saw their jobless rates rise in March from a year earlier. The national jobless rate is now at a quarter-century high of 8.5 percent and is expected to hit 10 percent by the end of this year. It will probably rise a bit higher in early 2010 before starting to slowly drift downward.

Most analysts don't think it will return to normal -- around 5 percent -- until 2013.

More layoffs were announced this week. Textron Inc. said it will eliminate 8,300 jobs, or 20 percent, of its global work force, as the recession weakens demand for corporate planes. The maker of Cessna planes, Bell helicopters and turf-maintenance equipment earlier this year said it would reduce its work force by 6,200 jobs, or 15 percent, mostly at Wichita, Kan.-based Cessna.

General Motors Corp. laid out a restructuring plan that includes cutting 21,000 U.S. factory jobs by next year. Clear Channel Communications Inc., the largest owner of U.S. radio stations, said it's cutting 590 jobs in its second round of layoffs this year amid pressure from the recession and evaporating advertising budgets. And bearings and specialty steels maker Timken Co. indicated it will cut about 4,000 more jobs by the end of this year after earlier suggesting about 3,000 jobs already had been targeted.