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Consumer spending rises in Jan., unlikely to last

March 03, 2009|Associated Press

Consumer spending rose in January after falling for a record six straight months, but the increase was expected to be fleeting given all the problems facing the economy.

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

The Commerce Department report on consumers showed spending rose 0.6% in January, even better than the 0.4% gain economists expected.

Personal incomes rose 0.4% in January, partly reflecting the cost-of-living adjustments provided to millions of Social Security recipients. Still, that was better than the 0.2% decline economists expected.

The personal savings rate surged to 5%, the highest level since 1995 as consumers continued to sock away more of their incomes amid the deepening recession.

The 0.6% rise in spending followed a record six straight declines, including a 1% 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% rise in purchases of nondurable goods, led by much higher spending on food. Durable goods posted a 0.1% increase, as Americans again avoided spending on cars and other large items.

Although the 0.6% 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 of a century.

The Commerce Department also reported that construction spending fell 3.3% in January, more than twice as much as economists expected. Residential construction fell 2.9% and nonresidential activity dropped 4.3%, the biggest decline since January 1994.

In the manufacturing industry, the Institute for Supply Management said its measure of factory activity showed the sector contracting for the 13th straight month in February. The index actually rose slightly to 35.8 last month, while analysts had expected a drop to 33.8. But a reading below 50 indicates the sector is shrinking. The index hit a 28-year low of 32.9 in December.

The cutback in consumer spending has been a key factor in making this recession so severe. The government reported last week that the overall economy, as measured by gross domestic product, shrank at an annual rate of 6.2% 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% in January after three straight monthly declines that reflected sharp drops in energy costs. Excluding food and energy, the price gauge rose 0.1% in January and has risen only 1.6% in the last 12 months.

Consumer spending, which accounts for about 70% of total economic activity, fell at an annual rate of 4.3% during the fourth quarter, the biggest drop since the second quarter of 1980.

The 0.4% 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%.

But 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.

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