Consumer spending dips by 0.2 percent in December; incomes rise solid 0.4 percent

By

Posted 9:30AM on Thursday, January 31, 2002

WASHINGTON - Consumers, the lifeblood of the economy, trimmed their spending in December as free-financing offers for cars and other incentives began to wane. Incomes rose solidly. The 0.2 percent drop in spending followed a revised 0.3 percent decline in November, a much smaller decrease than previously reported, the Commerce Department said Thursday. Even with these modest declines, consumer spending, which accounts for two-thirds of all economic activity, held up well even as the country suffered through a recession that began in March and got another jolt by the Sept. 11 terror attacks. Cash left over from home refinancing stemming from low mortgage rates, heavy discounting by retailers and zero-percent financing have induced people to spend. In the fourth quarter, consumer spending rose by a surprisingly strong 5.4 percent, one of the reasons the economy was able to grow at a 0.2 percent rate during the period and defy expectations of another negative quarter. Americans' incomes, which include wages, interest and government benefits, rose by a solid 0.4 percent in December, after being flat the month before. The income and spending figures are not adjusted for inflation. For all of 2001, Americans' incomes and spending each rose by 4.9 percent. While the increase in spending was the smallest since 1991, the fact that consumer spending didn't collapse under the strain of rising unemployment and economic turmoil was heartening to many economists. The nation's unemployment rate, 5.8 percent, is expected to rise in the coming months. Economists say the strength of the economic recovery will depend in part on how consumers react with their pocketbooks and wallets to higher unemployment. In another report, new claims for unemployment benefits last week rose by a seasonally adjusted 30,000 to 390,000, following three straight weeks of declines, the Labor Department said. The more stable four-week moving average of claims, which smoothes out week-to-week fluctuations, however, declined to 386,000, the lowest since Aug. 18. Citing signs of an economic rebound, the Federal Reserve opted Wednesday to leave interest rates alone, ending a yearlong uninterrupted stretch of credit easing. The Fed's 11 rate reductions last year pushed consumers' borrowing costs down to the lowest level since November 1965. One of the reasons the Fed has been able to cut rates so aggressively is because inflation has remained under control. U.S. workers' wages and benefits, as measured by the Labor Department's employment cost index, rose 0.9 percent in the fourth quarter, down slightly from a 1 percent rise in the third quarter, according to a third report. The index is a closely watched inflation gauge. With income growth outpacing spending, the nation's personal savings rate -- savings as a percentage of after-tax income -- was lifted to 1 percent in December from 0.5 percent the month before. For all of 2001, the savings rate averaged 1.6 percent, an improvement over the average rate of 1 percent recorded in 2000. Still, economists say the savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real-estate values or from financial investments.