U.S. Economy: Spending Slows, Confidence Weakens
By Bob Willis
Spending by American consumers, who have sustained the economy amid housing's worst downturn in a generation, rose in February at the slowest pace in more than a year.
The 0.1 percent increase in purchases followed a 0.4 percent gain in January, the Commerce Department said today in Washington, matching economists' projections. The report also showed the Federal Reserve's most closely watched measure of inflation cooled. Meanwhile, the Reuters/University of Michigan index of consumer sentiment fell to a 16-year low.
Falling home prices, job losses and higher gasoline prices are driving down consumer spending, which accounts for more than two thirds of the economy. Just as the figures were released in Washington, J.C. Penney Co., the third-largest U.S. department- store chain, cut its sales and earnings forecasts.
``The momentum is still down and I expect we will see negative spending numbers in the second quarter,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``It's almost a done deal that inflation pressures will soon fade. Recessions invariably lead to lower inflation.''
The consumer sentiment index decreased to 69.5 in March, from 70.8 in February and down from a preliminary reading of 70.5. The figure was less than analysts anticipated.
Treasury notes strengthened, with the benchmark 10-year note yielding 3.44 percent at 4:25 p.m. in New York, down from 3.53 percent late yesterday. The Standard & Poor's 500 Retailing Index closed 2.7 percent lower at 379.58.
`Much Too Slow'
``Regardless of what you call it, it's a period of growth that's much too slow relative to what we'd like to see,'' Boston Fed President Eric Rosengren said today after a speech in Seoul.
Incomes rose 0.5 after a 0.3 percent increase the prior month, today's report showed. The median forecast was for a gain of 0.3 percent. An increase in government Medicare prescription- drug payments boosted the figure. Wages and salaries rose just 0.3 percent after a 0.5 percent gain in January.
The report's measure of overall prices rose 0.1 percent and was up a less-than-forecast 3.4 percent in the year ended in February.
The core price measure, which excludes food and fuel and is the Fed's preferred gauge, rose 0.1 percent last month and was up 2 percent from February 2007, Commerce said. The year-over-year increase matched the downwardly revised gain in January.
Price Increases Contained
The deceleration put it at the bottom of the Fed's 2 percent to 2.2 percent forecast for this year.
``It allows the Fed to cut rates, should they choose to, going forward,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview.
The savings rate improved to 0.3 percent from a minus a 0.1 percent the prior month. A negative rate indicates consumers drew down savings to maintain spending.
Adjusted for the increase in prices, spending was unchanged in February after increasing 0.1 percent.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, increased 0.2 percent. Purchases of non-durable goods decreased 0.1 percent and spending on services, which account for almost 60 percent of all outlays, was unchanged.
The biggest job losses in five years and record fuel costs are eroding confidence and spending. The economy lost 85,000 jobs in the first two months of the year, the biggest back-to-back drop since 2003.
Slowest Since 1991
Consumer spending will grow at a 0.5 percent pace in the first quarter, the slowest rate since the 1991 recession, according to a Bloomberg survey of economists taken the first week of March.
More and more economists are forecasting a recession as job, retail sales and manufacturing data have deteriorated this year. Martin Feldstein, the Harvard economics professor who heads the research group that determines when downturns begin, said this month that a contraction had already begun.
Seeking to ease credit, restore confidence in financial markets and cushion the slowdown, the Fed last week lowered the benchmark overnight lending rate between banks by three-quarters of a percentage point to 2.25 percent.
``Consumers are growing increasingly concerned about the economic outlook and their future finances,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in an interview with Bloomberg Television. ``They're concerned about the labor market, they are being hit by falling home prices, and financial markets have been quite turbulent.''
Wages also aren't keeping up with inflation. Adjusted for prices, hourly earnings for the 12 months through February fell 0.8 percent, according to figures from the Labor Department.
General Motors Corp. and Ford Motor Co. are among companies experiencing the slump in consumer demand first hand. Cars and light trucks sold at an average 15.25 million annual pace in the first two months of the year, the weakest two-month pace since 1998.
``It feels like there is a recession,'' Troy Clarke, GM's North American chief, told reporters in Atlanta on March 11.