Consumers Spend More As Gasoline Prices Fall
November's Increase Is First Since Spring, but Gains May Be Fleeting

By Annys Shin
Washington Post Staff Writer
Thursday, December 25, 2008

Consumers increased their spending last month for the first time since spring, as falling gas prices helped boost their purchasing power, new data showed yesterday.

On an inflation-adjusted basis, consumers spent 0.6 percent more in November than they did the month before, the Commerce Department reported, the first increase since May. Disposable income also rose on an inflation-adjusted basis, by 1 percent, compared with an increase of 0.7 percent in October.

But even as consumers returned to stores and shopping malls, analysts cautioned that the data did not signal the start of a turnaround for the economy. Because energy prices are unlikely to sink at the same clip they have over the past few months, Americans won't be able to pocket much more savings at the pump.

"Much of the declines are behind us and won't be a significant event as we go into 2009," said Sung Won Sohn, an economist at California State University, Channel Islands.

Consumer spending drives 70 percent of U.S. economic activity, and last month's data were slightly better than expected. That suggests that retailers, offering deep discounts in an effort to salvage the holiday shopping season, may have had some success in reeling in customers.

Consumers kept their eye on their bottom line, however, hitting discount retailers and avoiding big-ticket items such as refrigerators, washing machines and automobiles. In November, new orders for durable goods -- which offer clues about how the economy is likely to perform in the near future -- were down 1 percent, to $186.9 billion, according to U.S. Census Bureau data issued yesterday.

Excluding defense-related spending, new orders were down 0.9 percent. While that's an improvement over October's 8.4 decline, Wachovia economist Sam Bullard said it doesn't make the overall picture any brighter.

"The fundamentals for the domestic and the international economy are still pretty dim," Bullard said. "We're seeing nothing in the economy right now that is going to change that trend."

Many consumer share that pessimism and chose to save more last month. Personal savings as a percentage of disposable income rose to 2.8 percent, up from 2.4 percent in October. Analysts said that was understandable given the relentless stream of bad economic news, including mounting unemployment.

"People are nervous their job could be at risk," said Ed Hyland, global investment strategist for J.P. Morgan Private Bank in New York.

In recent weeks, employers across a broad swath of industries have announced job cuts. In November, Fidelity Investments in Boston let go 1,300 people and said it plans to lay off 1,700 more early next year. Toymaker Mattel said it would cut 1,000. General Motors said it would cut 5,500 jobs.

Last week, the number of people filing for unemployment benefits for the first time surged by 30,000, a higher-than-expected amount, to reach 586,000, a level not seen since 1982. The four-week moving average, a more reliable indicator of unemployment claims, rose to 558,000 from 544,250, also a 26-year high.

The increase in jobless claims helped drive down the price of oil yesterday. A barrel of light sweet crude for February delivery sank $3.63 -- more than 9 percent -- to close at $35.35 as of 2 p.m. in a shortened day of trading at the New York Mercantile Exchange. Traders were also reacting to further evidence of weak demand for crude from the Energy Department. Inventory in Cushing, Okla., where oil traded in New York is stored, last week reached its highest level since the agency began keeping records four years ago.

Many economists expect that, following a couple more weak quarters, the economy will respond in the second half of next year to the Federal Reserve's decision to keep interest rates near zero, as well as to a massive stimulus plan being proposed by President-elect Barack Obama.

Obama is crafting a stimulus plan that he says will create or save at least 2.5 million jobs over two years. Transition officials are currently negotiating details with Congress, and lawmakers hope to take up the measure as soon as they reconvene on Jan. 6. They have said they hope to pass a bill and have it ready for Obama's signature shortly after he takes office.

There are signs consumers and homeowners have begun responding to falling mortgage rates. Freddie Mac reported yesterday that interest rates on 30-year loans averaged 5.14 percent this week, the lowest point since Freddie Mac's weekly mortgage rate survey began in 1971.

At 5.14 percent, the monthly principal and interest payment on a $200,000 loan is $1,091. That's $130 a month less than the same loan would have cost at last year's rates. A year ago, rates stood at 6.17 percent.

Homeowners have rushed to refinance their loans to cut costs or switch from adjustable-rate mortgages to fixed-rate loans. Last week, mortgage applications jumped to the highest level in five years, according to a report from the Mortgage Bankers Association.

While more than 80 percent of those were applications were for refinancing, the association also measured an 11 percent increase in applications for home purchase loans.

Refinancing may help homeowners keep their homes and keep more mortgage-related assets from going bad. But if the economy continues to deteriorate at the current pace, Sohn, the Cal State economist, said he fears a turnaround won't arrive next year, even with a stimulus.

"What I worry about is that downward momentum. It's so strong we've been surprised every week," he said, referring to a steady barrage of worse-than-expected data over recent weeks. "Also the confidence and expectations are so low. It's hard to turn that thing around."

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