Data points to weaker economic momentum

WASHINGTON (Reuters) - The U.S. economy appeared to downshift as it entered the second quarter, with consumers increasing their spending only modestly last month and a gauge of business activity in the Midwest falling sharply in April.

Consumer spending rose 0.1 percent in March from a month earlier when taking inflation into account, the Commerce Department said on Monday.

Separately, a report from the private Institute for Supply Management-Chicago showed business cooled much more than expected in the Midwest during April.

"The economy is losing a little momentum," said Gary Thayer, a macro strategist at Wells Fargo Advisors in St. Louis.

The U.S. recovery had already slowed substantially in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, data on Friday showed. Gross domestic product expanded at a 2.2 percent annual rate in the first three months of the year compared to 3 percent in the fourth quarter.

Stronger consumer spending cushioned the blow in the first quarter, but Monday's data suggested consumers ended the period spending less freely.

Consumer spending climbed 0.3 percent in March, just below the median forecast in a Reuters poll, but inflation ate up most of that gain. "The higher gas prices we saw last month are taking their toll," said Todd Schoenberger, managing principal at the Black Bay Group in New York.

After-tax income climbed 0.2 percent when accounting for higher prices, the Commerce Department said.

The data pushed U.S. stocks lower and lifted prices for the country's government debt. Investor sentiment also was hurt by confirmation that Spain sank into recession in the first quarter.

MIDWEST DOWNSHIFTS

The ISM-Chicago index for the Midwest, which is based on a survey of both factories and service businesses, fell to 56.2 in April, its lowest level since November 2009.

It was the second consecutive monthly decline, although the gauge stayed above the 50 level that separates growth from contraction.

The reading follows several regional manufacturing surveys that have also suggested the economy started the second quarter on a soft note.

Another survey released on Monday showed that U.S. small business hiring slowed considerably in April, adding to signs of weakening in labor market conditions. Businesses added 40,000 new jobs, a step back from the 75,000 positions created in March, according to Intuit, a payrolls processing firm.

The government's closely monitored employment report due on Friday is expected to show that payrolls increased 170,000 in April, according to a Reuters survey.

The U.S. economy is still limping back from the 2007-2009 recession, with an unemployment rate still over 8 percent and households stretched thin by a sour housing market.

The fraction of Americans owning homes fell to a 15-year low at 65.4 percent in the first quarter, the Commerce Department said in another report. That suggests an ongoing fall in home prices is discouraging people from buying.

Despite the cool down in economic growth, many economists doubt the U.S. Federal Reserve will engage in another big round of monetary stimulus.

The Commerce Department's income and spending report on Monday showed inflation is running above the Fed's target. A price index for personal spending rose 2.1 percent in the 12 months through March, just above the central bank's 2 percent goal.

Indeed, a measure of so-called core prices, which strips out food and energy costs, suggested inflationary pressure may be building up. The core index, which is often read as a measure of inflation trends, rose 2.0 percent in March from a year earlier, the biggest year-on-year rise since November 2008.

(Additional reporting by Ryan Vlastelica and Ellen Freilich in New York and Ann Saphir in Chicago; Editing by Andrea Ricci)

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