US household spending rises

American consumer spending grew at the fastest pace in three years during the first quarter of this year, a sign that the largest part of the economy is gaining speed while becoming less dependent on government stimulus.

Household purchases rose at a 3.6 per cent pace from January through March, exceeding the median forecast of economists surveyed by Bloomberg News, Commerce Department figures showed.

The increase helped the economy expand at a 3.2 per cent annual rate, capping the best six-month performance since the second half of 2003.

Americans are taking on a bigger role in the rebound that's so far been driven by a surge in manufacturing.

While wealth has been bolstered in part by higher stock prices, sustained job creation is needed for bigger gains in the spending that accounts for 70 per cent of the economy.

"Consumers spent a lot more on everything," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. "The economy continues to put distance between itself and the recession as activity expanded solidly in the first quarter of the year."

Stocks dropped on Friday as a federal investigation into Goldman Sachs Group tempered optimism that rising earnings have justified a 13-month rally.

The Standard & Poor's 500 Index fell 1.7 per cent to close at 1186.69.

Coming off the worst contraction since the 1930s, the strength of the economic rebound over the past three quarters has fallen short of the 7.5 per cent gain on average in the nine months following the 1981-82 recession, the last slump to persist for more than a year.

"The recovery looks muted by historical standards," said Neal Soss, chief economist at Credit Suisse in New York.

Consumer spending was unlikely to be as strong as it was in the 1980s and 1990s, he said.

Spending added 2.55 percentage points to gross domestic product, the most since the last three months of 2006.

Household purchases dropped 0.6 per cent last year, the biggest decrease since 1974.

Business activity expanded in April at the fastest pace in five years and consumer confidence declined less than projected, other reports showed.

The Institute for Supply Management-Chicago said its business barometer rose to 63.8 last month, the highest level since April 2005, from 58.8 in March. Figures greater than 50 signal expansion.

The Reuters/University of Michigan final index of consumer sentiment dropped to 72.2, from a reading of 73.6 in March. The gauge was projected to fall to 71 from a month earlier, according to the median forecast in a Bloomberg News survey of 66 economists.

"We're benefiting from a consumer who's feeling just a little bit better," Troy Alstead, chief financial officer of Starbucks, said after the Seattle-based company announced earnings on April 21.

The world's largest coffee-shop operator raised its annual forecast after reporting second-quarter profit that beat analysts' estimates.

- BLOOMBERG