Consumer Spending Drops in December While Savings Rates Increase

The Commerce Department reported Monday that personal consumption spending dropped by 1 percent in December. That was slightly worse than the 0.9 percent decline some economists expected.

Reflecting a recent flurry of job losses, incomes also fell for a third straight month in December, but the 0.2 percent drop was slightly better than expected.

Analysts polled by Reuters had forecast spending falling by 0.9 percent and incomes slipping 0.4 percent.

Amid fears of further job cuts and economic uncertainties, Americans boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May, the Associated Press reported.

A barrage of gloomy economic reports have underscored the tenuous situation facing American households — including new data released last week showing that the gross domestic product, a value of all the goods and services produced in the U.S., shrank at a 3.8 percent annual rate, the worst performance since the recession of 1982.

The savings rate for all of 2008 rose to 1.7 percent — well above the savings rates of recent years when soaring home prices and a booming stock market made Americans feel less concerned about saving. The savings rate had dipped to a low of 0.4 percent in 2005, the peak of the housing boom.

“The numbers are pretty close to expectations. I would note the increase in the savings rate. This gets into the idea that if people start saving more they will be spending less, so the downturn will be more severe and long lasting,” Scott Brown, Chief Economist at Raymond James & Associates in St. Petersburg, Fla., told Reuters.

For the whole of 2008, spending rose 3.6 percent, the smallest increase since 1961. Incomes increased 3.7 percent, the smallest advance since 2003.

For December, the 1 percent drop in consumer spending represented the sixth straight decline, a stretch not seen since the government began keeping monthly records on incomes and spending a half-century ago, according to the AP.

Last week, the Conference Board’s Consumer Confidence Index edged down to 37.7 from a revised 38.6 in December. The index has hit its lowest troughs since it began in 1967, and is hovering at less than half its level of January 2007, when it was 87.3.

The 1 percent drop in consumer spending in December also comes as the nation’s retailers reported their worst holiday sales season in at least four decades and automakers struggled with falling demand.

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