Despite Gas Prices, Hiring Likely to Boost Spending

Consumers as a whole will likely spend more this year. But it's not because we'll all be earning more money. Even people lucky enough to get a raise will likely spend most of the extra dollars to pay higher gas and food prices.

Yet employers are hiring more freely this year and more people working means more money being spent to fuel the economy.

"It is hard to spend money without an income. More jobs will be good for consumer spending," said David Wyss, chief economist at Standard & Poor's in New York.

People made more money and spent more money in March, the Commerce Department reported Friday. But after adjusting for inflation, spending rose only 0.2 percent and after-tax incomes were essentially flat.

Consumer spending, which accounts for roughly 70 percent of economic activity, grew at an annual rate of 2.7 percent in the January-March period. That was a sharp decline from the 4 percent growth in the previous quarter.

Less spending led the overall economy to grow at only a 1.8 percent annual rate in the first three months of the year -- weaker than the 3.1 percent growth in the October-December quarter of 2010.

Americans were poised to spend more this after Congress agreed to give them a 2 percentage-point cut in Social Security payroll taxes. But a steady rise in gas prices has siphoned away most of that extra money, leaving consumers with less discretionary money to spend on cars and appliances, at restaurants, and to take vacations.

Gas prices are showing few signs of easing. The national average at the pump on Friday was $3.91 a gallon-- 32 cents more than what consumers paid at the end of March and a dollar more than what they paid a year ago.

"Consumers have been taking the money from their tax cuts and putting it in their gas tanks to drive to work," said Mark Zandi, chief economist at Moody's Analytics. "The higher gas prices have really sucked the wind out of consumers' purchasing power."

Zandi and other economists are optimistic that gas prices will level off this spring, before dropping in the summer or fall. That would give people more discretionary money and help lift economic growth to more than 3 percent for the rest of 2011, they say.

At the same time, the economy is benefiting from the best two-month hiring stretch in five years. Unemployment dropped to a two-year low of 8.8 percent in March. Economists expect employers will keep adding around 200,000 jobs a month through the end of the year. As more people find jobs, spending will rise.

Silver Mania May Soon End

After silver's impressive climb toward $50 an ounce, it would be difficult for anyone to believe the rally in silver is nearing an end, but it just might be. The more than 50% price spike year to date may be too good to be true. After all, analysts and traders alike have been singing the praises of silver for years, and now that tone is changing.

"We're concerned because the rate of ascent in silver prices keeps accelerating," said Mark Thomas, chief investment strategist at TheSilverShortage.com, which offers a newsletter about silver and silver mining investments. "A parabolic move like that can ruin any bull market short term."

"We have now entered just the beginning of the third [and final] phase of the bull market in precious metals" — the phase in which everyone has become aware of the bull market but aren't yet engaged and involved in it, he said. The third phase is far from over but when it ends, "precious metals will become a bubble with heavy public participation."

Now even The Grandich Letter Editor Peter Grandich, a self-proclaimed former "raging bull" on silver from under the $10 level, is saying "sell all silver holdings."

"It's not that it can't go higher but I can't first start buying it here, and I learned it's best to consider selling when you can't buy anymore," he said. So, "if you like crowds, feel free to stay on board. For me, around $50 is a lovely destination to get off for a trip now eight years in the making."

In fact, quite a few analysts who have watched the silver market for years are throwing caution to the wind.

Chintan Karnani, chief analyst at Insignia Consultants in New Delhi, said he was bullish at the start of the year, in part, because of silver's relative underperformance versus gold over the past three years.

Long term, he still expects silver prices to find support as currency markets breakdown, sovereign debt risk rises in the euro zone and other nations and calls for democracy in the Middle East and North Africa grow, with silver seen as a "cheaper alternative to gold for investment."

Karnani never expected, however, that silver would be near $50 by the end of April.

"I am not bearish on silver. I am only concerned over the pace of the rise of silver," he said. "For long-term sustainability, silver prices must fall for a week and then rise. If silver prices continue to rise, then a bubble will be formed and silver prices can crash to $25 next year."

At this "important pivot point" in silver, the question is "sell now, or sell later?" said Jon Nadler, a senior analyst at Kitco Metals Inc.

"Silver can make for happy buyers on occasion, but also for despondent ones more often than not," Nadler said. Silver has "no business in or near the $50 an ounce region. It has been pumped up to these levels by the funds and I think they might get their hands slapped soon over this one."

Dow Nears Three-Year High

U.S. stocks closed higher Friday to tally weekly and monthly gains, as a rally in shares of blue-chip component Caterpillar Inc. on better-than-expected earnings helped lift the Dow Jones Industrial Average to its highest closing level in nearly three years.

The Dow industrials rose 47.23 points to close at 12,810.54, scoring a weekly gain of 2.4% and a monthly gain of 4%.

The benchmark index, which has now climbed for five straight months, logged its highest closing level since May 20, 2008.

"The Dow gave the royal wedding a token gift by finishing to the upside," said Brian Greenberg, owner of wealth-management firm Brian Greenberg & Associates in Marlton, N.J. "But kudos should really go to [Federal Reserve Chairman] Ben Bernanke, as he vows to keep interest rates low forever, or at least for awhile."

Bernanke's "declaration that inflation is not a problem will result in continued pressure on the dollar, which last we looked, has been a big positive for the stock market," he wrote in emailed comments.

Of the blue-chip index's 30 components, 18 finished higher, led by Caterpillar, up 2.5% after the heavy-equipment maker's first-quarter profit climbed to a record level, with robust global demand helping it overcome escalating material costs and continued softness in the domestic construction industry.

Microsoft Corp., off 3%, was the Dow's heaviest weight a day after the software company reported a decline in quarterly Windows sales.

Keith Springer, president of Springer Financial Advisors in Sacramento, Calif., said the U.S. stock market was "still running on the sugar high" from Bernanke's comments Wednesday.

But he also pointed out that although the Fed said there would be no new quantitative-easing program, primarily to satisfy the inflation hawks, "the continuation of low interest rates for an extended period and the reinvestment of existing bond proceeds is essentially a QE mini," he added. That's "music to the stock market's ears."

Logging a weekly gain of 2% and a monthly rise of 2.9%, the S&P 500 Index rose 3.13 points to finish up to 1,363.61, with energy faring best and telecom performing worst among the index's 10 industry groups.

The Nasdaq Composite gained 1.01 point to 2,873.54. It finished the week up 1.9% and the month up 3.3%. ‘