People spend more; stores add inventory

WASHINGTON — Shoppers and businesses are feeling better about the recovery.

That was the encouraging message from a trio of economic reports Wednesday — and from Federal Reserve Chairman Ben Bernanke, who told lawmakers that the country's modest rebound is sustainable.

Retail spending rose sharply in March. Consumer inflation remained all but invisible. And businesses boosted their stockpiles in anticipation of higher shopper demand.

The improving economy also lifted first-quarter earnings at JPMorgan Chase & Co. That was the latest sign that the biggest banks are gradually putting the financial crisis behind them.

Bernanke spoke on the same day that the Fed reported the recovery is spreading to most parts of the country. Merchants are enjoying better sales and factories are boosting production, but companies are still wary of ramping up hiring, the Fed reported. But Bernanke also told Congress that the recovery is not strong enough to shrink the unemployment rate much.

Some economists were surprised by the retail sales gains, especially in light of the 9.7 percent unemployment rate.

"Unemployment rates may be high, consumer confidence may be low and job and income gains may be minimal, but that doesn't seem to be stopping people from shopping," said Joel Naroff, chief economist at Naroff Economic Advisors.

Naroff and others question whether the spending gain can be sustained.

"We still fear it won't be," Paul Ashworth, a senior economist at Capital Economics, wrote in a research note. "High unemployment, weak income growth, low confidence, tight credit conditions and the need for debt (reduction) all point to restrained consumption growth over the next couple of years."

Still, better weather and auto incentives brought shoppers out in force last month. It was the latest evidence of a gradually strengthening recovery. Sales surged 1.6 percent, the Commerce Department said, up from February's revised 0.5 percent gain. That was better than most economists had predicted.

Increases were posted across the board. Car dealers, home furnishing stores, building suppliers, sporting goods stores, clothing retailers and general merchandise stores all reported gains. Auto sales surged the most since October.

Separately, the government said consumer prices inched up just 0.1 percent in March. And excluding food and energy, prices were unchanged in March. Over the past 12 months, those prices have risen at the slowest pace in six years. Still, households remain under pressure as hourly earnings fell again last month.

Businesses also boosted their stockpiles for the second straight month in February. That's a sign that they expect consumers to keep spending.

Factories, retailers and wholesalers had slashed inventories during the recession as sales plummeted. Sustained gains in sales may persuade businesses to continue rebuilding their stockpiles. That would stimulate factory production and support the economic recovery.

The recovery has begun to benefit the largest banks, such as JPMorgan. It reported Wednesday a $3.3 billion first-quarter profit on solid gains in the financial markets. Its report also signaled some good news on the economy: The dollar amount of its loans in or near default fell.

Economists closely watch retail sales for signs that consumer spending, which fuels about 70 percent of the economy, is recovering. Shoppers cut back sharply and boosted their savings during the recession. Some appear to be spending more freely now.

"Consumers are coming out of their shells despite a very weak labor market," said Zach Pandl, an economist at Nomura Securities. They have "emerged from the financial crisis with fewer scars than we had feared."

Pandl estimates consumer spending rose by as much as 4 percent in the January-to-March quarter. That would more than double the 1.6 percent rise in last year's fourth quarter. And it would amount to the biggest quarterly gain in three years.

Consumers' willingness to spend more despite scant pay increases means they are likely "looking ahead to better times," Nigel Gault, chief U.S. economist at IHS Global Insight, said.