Consumer Spending Continues to Drop

By Annys Shin
Washington Post Staff Writer
Tuesday, February 3, 2009

Consumers in December scaled back on spending for the sixth month in a row -- even though they had slightly more to spend -- in a sign that Americans remained nervous about the future.

As the economy spiraled downward at the end of 2008 and contracted at the fastest pace in more than 20 years, consumers retreated, spending $102.4 billion, or 1 percent, less than the month before, Commerce Department data issued yesterday showed. The savings rate rose to 3.6 percent from 2.8 percent.

Consumers decided to hang onto more of their money even though disposable income rose slightly when adjusted for inflation. It increased by 0.3 percent, compared with 0.8 percent in November, suggesting that the impact of falling gasoline prices, which left more cash in consumers' wallets last fall, is fading.

"It really helped the average American that gasoline fell back this past fall and winter, but that's basically behind us," said Stuart Schweitzer, global markets strategist at J.P. Morgan's Private Bank. "Consumers now are forced to look to their monthly paychecks as the primary source of spending power, especially when they are reluctant or less able to access those sources of credit that were so important to their spending in years past."

The falloff in consumer spending has cut off oxygen to countless retailers, putting household names such as Circuit City and Linens 'n Things out of business. Macy's yesterday announced it is cutting 7,000 jobs, or 4 percent, of its workforce and slashing capital spending. California toymaker Mattel said its fourth-quarter profits plunged 46 percent from the comparable period last year despite predictions by industry leaders and analysts last fall that parents would not skimp on gifts for their children even during a recession.

A private research group said yesterday that the manufacturing sector continued to shrink last month, although at a slower pace than expected. The Institute for Supply Management said its index of manufacturing activity for January was 35.6 percent, 2.7 percentage points higher than in December. A reading above 50 percent indicates that the manufacturing sector is expanding; below 50 percent indicates that it is contracting.

In recent months, plummeting demand has left manufacturers in the United States and abroad with huge inventories of unsold goods. But a greater-than-expected increase in new orders reported by the Institute for Supply Management suggested to some analysts that businesses might be on the path to getting inventory levels under control.

"This morning's report tells us companies are getting a handle on their inventory positions," Schwetizer said.

Home builders have been trying to bring production in line with demand by reducing construction. Residential construction spending dropped by 22.3 percent in 2008, the Commerce Department reported yesterday. Construction of hotels and oil refineries, which have been in the works for two or more years, helped push nonresidential spending up by 8.1 percent last year. But that is likely to change this year because there is so little financing for new projects, said Ken Simonson, an economist for the Associated General Contractors of America.

He forecasts a drop of 3 to 9 percent in nonresidential construction spending this year, depending on the impact of a government stimulus package. The House approved an $819 billion stimulus bill last week. The Senate began debate over an $884 billion package yesterday.

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