'Economy's Main Engine' Now in Idle

Consumer Spending Stagnates, Increasing Likelihood of a Recession

Wary of a shaky economy and rising fuel prices, U.S. consumers kept their wallets in their pockets in February, resulting in the slowest growth in personal spending in more than a year.

Personal spending increased by 0.1 percent in February but was flat when adjusted for inflation, according to Commerce Department figures released yesterday. That was the slowest growth since September 2006.

Consumer spending accounts for two-thirds of the gross national product, and economists said that its stagnation indicates that the economy is still at risk of a recession.

"Consumer spending in real terms is dead in the water and hasn't grown in months," said Joshua Shapiro, the chief U.S. economist at MFR, a New York research firm. "The economy's main engine of growth is basically stuck in neutral."

There was a 0.5 percent increase in personal income during the month, but several economists dismissed the increase as a reflection of accounting adjustments and said it was more than offset by other factors. Underscoring that view, 86 percent of consumers believe the U.S. economy is in recession, the highest level since the recession of the early 1980s, according to a survey released yesterday by the University of Michigan and Reuters.

U.S. stocks stumbled on the news. The Dow Jones industrial average lost 86.06 points to close at 12,216.40. The Standard & Poor's 500-stock index, a broader measure, lost 10.54 points to close at 1315.22. The tech-heavy Nasdaq composite index lost 19.65 points to close at 2261.18.

Indicating that the slowdown in spending is likely to continue in March, J.C. Penney reported yesterday that sales through the Easter holiday were "well below expectations." The retailer cut its expectations for the month by at least a third and said it would continue to grapple with a "difficult environment" through 2008.

The company's customers are facing higher energy costs, job losses and a housing slump, which have pushed down prices, Myron Ullman, J.C. Penney's chairman and chief executive, said in a statement. "The sharp decline in sales is reflective of these trends," he said.

The company's stock fell 7.5 percent in trading yesterday, and the pessimistic outlook caused a drag on other retailers, including Macy's, which lost 6 percent, and Target, which was down 2.5 percent.

The sector is "getting hit hard" by the slump in consumer confidence and its prospects for growth are poor in the near term, said Joseph Brusuelas, chief U.S. economist at IDEAglobal, a research firm in New York and London. A reprieve may come in May as consumers begin to receive checks of up to $600 from the stimulus package passed by Congress, but that will be temporary, he said. "We're lucky that we didn't see consumer confidence drop any further," Brusuelas said.

An inflation gauge preferred by the Federal Reserve, which excludes volatile food and energy prices, was up 0.1 percent in February and up 2 percent compared with February 2007. That was welcome news for the Fed, which tries to keep inflation at about 2 percent. "The Fed is getting more concerned about inflation risks the lower it pushes interest rates, but this reading indicates that the Fed has room to cut further," Nigel Gault, U.S. economist for Global Insight of Waltham, Mass., said in a research note yesterday.

Illustrating the continuing troubles in the U.S. housing market, KB Home, one of the nation's largest home builders, said it swung to a loss during its first fiscal quarter because of write-downs and having to abandon some contracts. It reported a net loss of $268.2 million, or $3.47 a share, compared with a net gain of $27.5 million, or 34 cents a share, during the year-ago quarter. Revenue fell 43 percent, to $794.2 million.