The day of the consumer

SINCE last summer, consumer outlays have been about the only bright spot in the economy. Outlays, adjusted for inflation, have motored along at a brisk annualized growth rate of more than 4% in the fourth quarter of last year and more than 3% in the first quarter of this year. But it looks like households are going to hit a couple of speed bumps this quarter: Surging prices for food and fuels promise to put the squeeze on purchasing power. Don’t worry. The road in the second half of the year is beginning to look a little smoother.

In the next few months, though, the jolt from higher food and energy prices will be substantial. The latest trends in food and energy quotes suggest secondquarter consumer prices are on a path to rise about 5% from the first quarter. That would be enough to nullify most, if not all, the purchasing power of the quarter's expected rise in household income. In the three months through March, retail food prices rose at a 7.4%, the fastest such pace in 17 years. Among other things, this is also due to the January freeze that hit much of the U.S. citrus crop, other weather anomalies abroad, and the ongoing impact of having more corn diverted toward ethanol production.

One hope for the summer: Gas prices may be topping out. Daily retail prices tracked by the American Automobile Assn. began leveling off in mid-April. In fact, pump prices appear to have gotten ahead of themselves, historically speaking. Steady growth in jobs and incomes has helped smooth the way for consumers over the past year, and this year should be no different, especially given nascent signs that housing, and some of the economy's other weak spots, are stabilizing. In housing, weather volatility has pushed sales of existing homes up and down in recent months. The pattern in mortgage applications through mid-April also suggests housing demand is stabilizing.

Weekly data from the Mortgage Bankers Assn. show applications to buy a home have held fairly steady in recent weeks, despite a continuing decline in the number of home buyers seeking adjustable-rate mortgages. The subprime debacle clearly will delay the housing recovery. Banks are tightening their standards for lending to home buyers, and any rise in foreclosures will put more homes into inventory. But because lower prices, attractive interest rates, and continued income gains are boosting affordability in the prime market, the subprime mess does not appear to be generating any significant new round of weakness in housing demand.

Also encouraging for the second half, the buildup of business inventories that had depressed ordering and production is reversing. Orders received by manufacturers of durable goods rose 3.4% in March, the second advance in a row, and March factory output grew by 0.7%, the strongest gain since December. So, despite the headwinds buffeting consumers this quarter, their spending remains well supported. And in the second half, as the obstacles to overall growth fade, those underpinnings will only strengthen.