Spending stalls as confidence plunges
WASHINGTON — Consumer spending is threatening to stall out while consumer confidence, battered by soaring energy costs and falling home prices, has taken a steep nosedive.
Analysts said the two new reports Friday were just the latest danger signals that the country was edging perilously close to a recession.
The Commerce Department reported that spending posted a 0.4 percent rise in January, better than economists had been expecting. However, all of that gain came from a surge in inflation during the month.
Taking away the effect of rising prices, spending showed no gain in January, the second straight month that real spending failed to advance.
Other than two negative months in August and September of 2005, which reflected the disruptions from Hurricane Katrina, inflation-adjusted consumer spending has not been so weak since November and December of 2001, when the country was struggling to emerge from the last recession.
Meanwhile, another survey indicated that consumer confidence took a big drop in February. The Reuters-University of Michigan final reading on consumer sentiment fell to a reading of 70.8 in February, the lowest final monthly reading in 16 years and down sharply from 78.4 in January.
Earlier this week, the Conference Board reported that its confidence survey had plunged in February to the lowest reading since right before the start of the Iraq war in 2003.
Analysts said the slowdown in spending and the plunge in confidence reflected the drumbeat of bad news in recent months.
"The job market is weakening, house prices are plunging, stock prices are down and gasoline prices are headed higher," said Mark Zandi, chief economist at Moody's Economy.com. "The weight on consumers is growing increasingly heavy and their spending reflects that."
Wall Street saw stocks fall sharply as the weak economic reports, high oil prices and depressing corporate reports took their toll. The Dow Jones industrial average plunged 315.79 points to close Friday at 12,266.39.
A flat reading for inflation-adjusted spending in December and January means that last year ended and 2008 began on an exceedingly weak note for consumers, a serious development since consumer spending accounts for two-thirds of total economic activity.
Economic growth slowed to a barely discernible 0.6 percent pace in the final three months of 2007 and a growing number of economists believe it could turn negative in the first and second quarters of this year. The classic definition of a recession is two back-to-back quarters of declining gross domestic product.
Zandi said he believes the economy fell into a recession in December. He said he was looking for a mild downturn that will last until June, when the economy will get a jolt as consumers begin spending $107 billion in rebate checks expected to be sent out over 10 weeks starting in May.
However, he said the recent surge in energy prices could make the slump more severe. Oil prices jumped to record levels above $102 per barrel this week and some economists said gasoline prices, currently around $3.16 per gallon, could climb close to $4 per gallon during the height of the summer driving season.
That would mean consumers will be spending more on gasoline, leaving them with less to spend on other items. Zandi said the higher gasoline costs, if they persist, could drain about $90 billion out of consumers' pockets, a figure roughly equal to the $107 billion in rebate checks they are scheduled to get this year.
"They could be using their rebate checks to fill up their gas tanks," he said, a diversion that would mean the economy gets little added boost from the stimulus package. Zandi predicted that if that situation developments, politicians will rush to pass further stimulus help, not wanting to see the economy sink into a recession in an election year.
Incomes in January posted a 0.3 percent increase following a 0.5 percent gain in December. However, the January performance was boosted by a number of one-time factors, such as big annual bonuses paid to business executives.
A closely watched gauge of inflation that is tied to consumer spending rose 0.4 percent in January and was up 3.7 percent over the past 12 months, the biggest year-over-year gain since September 2005.
While many economists believe the country will slip into a recession this year, President Bush told reporters Thursday that he did not think the country was in a recession.
Federal Reserve Chairman Ben Bernanke signaled in congressional testimony this week that the Fed, which aggressively cut interest rates in January to try to stave off a recession, is prepared to cut rates further to shore up the economy, believing that weak growth is a bigger threat at the moment than higher inflation.
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