Wednesday, February 4, 2009, AM | 2 Comments
Many economists predict Wall Street is heading for another tumble, after a worse-than-expected drop in personal spending added to investors’ anxiety about the economy. The latest sign of this transition came Monday, when the US Commerce Department reported that consumer spending fell in December for a record sixth straight month, and worried about surging layoffs, boosted their savings rates to the highest level since May of 2008.
Incomes, reflecting a wave of layoffs, fell for a third straight month. but the 0.2% drop was slightly better than expected. The decline in November, however, was revised to show incomes dropped 0.4%, double the initial estimate.
For the year, incomes rose 3.7%, the weakest gain since a 3.2% advance in 2003.
Personal consumption spending dropped 1%. Analysts had predicted a decline of 0.9 percent. The government also revised its November estimate lower to show spending fell 0.8% rather than 0.6% in that month.
For the year, consumer spending rose just 3.6%, the smallest annual increase since 1961.
Still, Americans worried about the possibility of more job cuts boosted their savings rate to 3.6% of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8% in May.
For the year, personal saving averaged 1.7 percent. That was nearly three times the 0.6 percent savings rate for all of 2007 and far above the seven-decade low of 0.4 percent for savings hit in 2004, a year buoyed by a booming housing market.
The situation is now reversed. Housing prices, the biggest asset for most Americans, continue to plunge, and a severe financial crisis has roiled Wall Street, wiping out trillions of dollars in stock wealth.
Moral of the story
Consumer behavior in America appears headed toward a new normal that includes less household debt, more saving, and cooler expectations about home prices in the future.
Consumers slashed spending for an unprecedented sixth straight month in December, feeding the already painful recession as millions of households opted to save rather than buy.
The drop in consumer spending, the economy’s key driver, means little help is in sight for struggling retailers, home-builders and automakers.
With Americans desperate to rebuild savings and with the deepening recession raising their fears of layoffs, analysts said it’s no surprise the savings rate is rising.Facebook.com/doable.finance