Consumer spending rises in January after 6-month fall

WASHINGTON – 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.

A batch of fresh reports Monday showed little signs of an economic rebound, with the nonresidential construction spending falling to its lowest level in more than a decade and manufacturing activity contracting tumbling for a 13th straight month.

On Wall Street, the Dow Jones industrial average plunged below 7,000 for the first time since Oct. 28, 1997, as investors grew pessimistic about the health of banks and the economy.

The Dow – which lost about 230 points in afternoon trading and was heading toward 6,800 – last closed below 7,000 on May 1, 1997.

The Commerce Department report on consumers showed 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 government calculates the savings rate as a percentage of after-tax incomes. The growth from from 3.9 percent in December partly reflected that while overall incomes rose 0.4 percent, after-tax incomes shot up 1.7 percent, providing potentially more money for savings.

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 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 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.