Durable Goods Drop 6.4%, While Consumer Spending Growth Slows to 0.4%

Business and consumer demand in the U.S. appeared to slow in April, two government reports showed Friday. The two reports suggest the spending spree that has been an engine for the U.S. economy may be slowing down.

Orders for durable goods, a measure of demand for items meant to last for three or more years, posted the biggest decline since December 1991, dropping 6.4% in April to a seasonally adjusted $205.58 billion, the Commerce Department said. That followed a 4.5% increase in March to $219.72 billion, revised from an initial rise of 2.6%.

Meanwhile, growth in consumer spending slowed for the second straight month in April to a 0.4% pace from 0.6% pace in March, even as personal incomes rose 0.7% vs. 0.6% in March, the department reported.

Although the demand side of the U.S. economy remains vibrant, Friday's data could mark the beginning of a slowdown in some key areas of economic growth. It could show that nearly a year of the Federal Reserve's interest rate increases in an attempt to slow the economy may be finally bearing fruit.

But rising incomes, which have resulted from a 30-year low in unemployment, continue to worry economists and policy makers, who fear that businesses will eventually have to pass along higher worker costs in their finished products. So far, a technology-related surge in worker productivity since the mid-1990s has allowed businesses to offset rising worker costs, but Fed officials have repeatedly warned that a decline in productivity could be a catalyst for inflation.

The income increase in April included a 0.9% rise in wages and salaries, compared to a 0.6% rise in March.

The fact that incomes rose faster than spending in April helped to raise the so-called personal savings rate, a measure of the proportion of income that does not get spent, which rose to 0.7% in April from March's 0.4% rate. That could be an indicator that Americans, unnerved by a downturn in technology stocks and higher interest rates, may be starting to save some of their money instead of spending it.

Durable goods orders dropped for the third time in four months, surprising economists, who had been expecting a 0.3% increase, according to a Reuters poll. The report showed sharply lower demand for a variety of both consumer and capital goods, such as automobiles, electrical machinery and defense-related goods.

Excluding orders for transportation-related goods, demand dropped by 6.4% in April, and excluding defense-related goods, orders dropped 6%.

The data provide evidence that business and consumer demand for big-ticket items has finally been dented by the Fed's efforts to raise interest rates. Higher rates make it more expensive for consumers and businesses to borrow and spend, decreasing the potential for inflation.

The Fed has raised short-term interest rates, which act as a basis for other interest rates such as credit cards and mortgages, six times over the past year for a total of 1.75 percentage points. For its most recent increase on May 16, the Fed doubled the magnitude from previous five, to half a percentage point, as it intensified its efforts to slow overall demand in the economy.