Consumer Spending Rises Beyond Expectations in January

March 2, 2009 - 10:33 AM
<br />
Washington (AP) - Consumer spending rose in January after falling for a record six straight months, pushed higher by purchases of food and other nondurable items. But the increase is expected to be fleeting given all the problems facing the economy.
 
The Commerce Department said Monday that consumer spending rose 0.6 percent in January, even better than the 0.4 percent gain that economists expected.
 
Personal incomes rose 0.4 percent in January, partly reflecting the cost-of-living adjustments provided to millions of Social Security recipients. Still, that was better than the 0.2 percent decline economists expected.
 
The personal savings rate surged to 5 percent, the highest level since 1995 as consumers continued to sock away more of their incomes amid the deepening recession.
 
The 0.6 percent rise in spending followed a record six straight declines, including a 1 percent drop in December when retailers endured their worst holiday shopping season in at least four decades.
 
The January increase was driven by a sharp 1.3 percent rise in purchases of nondurable goods led by much higher spending on food. Durable goods posted a tiny 0.1 percent increase, as Americans again avoided spending on cars and other large items.
 
While the 0.6 percent increase in consumer spending was the largest since May, analysts do not expect the strength to continue amid a recession that's already the longest in a quarter-century.
 
The department also reported that construction spending dropped 3.3 percent in January, more than twice as much as economists expected. Residential construction fell 2.9 percent and nonresidential activity dropped 4.3 percent, the biggest decline since January 1994.
 
On Wall Street, the Dow Jones industrial average plunged below 7,000 Monday for the first time since Oct. 28, 1997, as investors grew pessimistic about the health of banks and the economy. The Dow last closed below 7,000 on May 1, 1997.
 
The cutback in consumer spending has been a key factor making this recession so severe. The government reported last week that the overall economy, as measured by the gross domestic product, shrank at an annual rate of 6.2 percent in the final three months of 2008. That was the sharpest fall in about 26 years.
 
The economic weakness is keeping a lid on inflation. A price gauge tied to consumer spending showed a modest increase of 0.2 percent in January after three straight monthly declines that reflected sharp drops in energy costs. Excluding food and energy, the price gauge rose 0.1 percent in January and has risen only 1.6 percent in the last 12 months.
 
Consumer spending, which accounts for about 70 percent of total economic activity, was falling at an annual rate of 4.3 percent during the fourth quarter, the biggest drop since the second quarter of 1980.
 
The 0.4 percent increase in personal incomes followed two months of declines and was somewhat surprising in light of the massive layoffs that have occurred this year. The country lost a net total of 598,000 jobs in January and the unemployment rate jumped to a 16-year high of 7.6 percent.
 
However, January incomes got a boost from the cost-of-living adjustment made to Social Security benefits and a pay raise given to federal civilian and military workers.
 
The slump in consumer spending in recent months has been tough on many of the nation's retailers. Macy's Inc. last month said its fourth-quarter earnings fell almost 59 percent, while J.C. Penney Co. recorded a 51 percent drop in earnings and projected a wider first-quarter loss than analysts had expected.
 
Wal-Mart Stores Inc., the world's largest retailer, managed to buck the trend. The company reported better-than-expected earnings for the fourth quarter as it appeared to benefit from a wave of store liquidations at former competitors such as Circuit City Stores Inc.