Data signal soft economy but not abrupt slowdown

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending fell in April for the first time in almost a year and already low inflation declined further, undercutting arguments for a tapering of the Federal Reserve's bond-buying stimulus.

Despite the energy-driven pullback in consumer spending last month, the economy is not slowing abruptly. Consumer sentiment approached a six-year high in May and factory activity in the Midwest regained speed this month, other data showed on Friday.

While this suggests the economy is squeezing out of a soft patch hit early in the second quarter, the strength might not be sufficient for the U.S. central bank to start scaling back the $85 billion in bonds it is buying each month.

"Any decision to slow the pace of bond purchases before the end of summer will likely be reduced at the margin, particularly given the benign inflationary backdrop," said Millan Mulraine, a senior economist at TD Securities in New York.

Consumer spending fell 0.2 percent, the weakest reading since May last year, the Commerce Department said. Consumer spending, which accounts for about 70 percent of U.S. economic activity, had edged up 0.1 percent in March.

Economists had expected a 0.1 percent gain last month.

But when adjusted for inflation, spending nudged up 0.1 percent last month after rising 0.2 percent.

The sixth straight month of gains in the so-called real consumer spending came as a price index for consumer spending fell 0.3 percent, the largest drop since July last year. It was the second straight month of declines in the index.

Over the past 12 months, inflation has slowed to just 0.7 percent, the weakest since October 2009 and pushing further below the Fed's 2 percent target. The price index had increased 1 percent in the period through March.

A core price index, which strips out food and energy costs, was up 1.1 percent in the past 12 months, compared with a 1.2 percent rise in March.

The tame inflation readings come on the heels of Fed Chairman Ben Bernanke's remarks last week that a decision to start tapering the $85 billion in bonds the Fed is buying each month could come at one of its "next few meetings" if the economy appeared set to maintain momentum.

The economy has shown some resilience, despite belt-tightening by Washington, helping to prop-up consumer confidence.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment rose to 84.5 from 76.4 in April, a separate report showed. It was the highest level since July 2007.

Manufacturing, which has been hit by belt-tightening by Washington, is also showing signs of recovery.

In a separate report, the Institute for Supply Management said its Chicago business barometer rose to 58.7 from 49 in April, handily beating economists' expectations for 50. A reading above 50 indicates expansion in the regional economy.

The gains were driven by a pickup in new orders and a jump in the employment measure.

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