Consumer Spending Down, But Savings Rates Up

Consumer spending fell in December, making it a six-month slid officially. Experts expect that consumer spending will continue to remain weak this year as people worry about layoffs and pay cuts. Since consumer spending is so important to a healthy economy, this will almost certainly prolong the ongoing recession.

The Commerce Department release official data that confirmed that consumer spending dropped 1% in December, slightly more that the 0.9% drop that was expected. Incomes dropped 0.2 percent in December, continuing a three-month slide.

Are you saving or spending?
Are you saving or spending?

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Americans worried about the possibility of more job cuts increased 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.

For the year, consumer spending rose 3.6 percent, the smallest annual increase since 1961. Incomes rose 3.7 percent, the weakest gain since a 3.2 percent advance in 2003.

American families are struggling with an intensifying recession that began in December 2007. Overall growth plunged at an annual rate of 3.8 percent in the fourth quarter of 2008, the biggest quarterly decline since a 6.4 percent drop in the first quarter of 1982.

The hard times are being made more severe as consumers cut back on their spending, which accounts for about 70 percent of total economic activity.

The savings rate for all of 2008 rose to 1.7 percent. While historically low, it is well above the savings rates of recent years when soaring home prices and a booming stock market made Americans feel more wealthy and less concerned about saving.

The savings rate had dipped to a low of 0.4 percent in 2005, the peak of the housing boom. That was the lowest annual savings rate in seven decades. Savings had turned negative during the depths of the Great Depression.

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

Retail Prices Fall in November

The U.S. Department of Labor reported that consumer prices fell 1.7% in November from the month before, the fastest drop on record. In part as a result of tumbling oil prices, which fell 17% over one month due to plummeted demand for gasoline, retailers and auto dealers were cutting prices throughout the month of November to bring back wary customers and boost consumer spending, which is also falling.

Vehicle sales tumbled 2.8%, as consumers face higher hurdles for auto loans. Sales at gas stations fell almost 15%, after a sharp drop in fuel prices.

The dip in consumer prices in November continued the October trend, when prices drop approximately 1%.

Sale: Prices Dropped as Retailer Tried to Boost Consumer Spending
Sale: Prices Dropped as Retailer Tried to Boost Consumer Spending

As the United States generally holds a steady inflation rate of about 2% each year, the drop in prices is cause for concern among economists.

“All the factors which had contributed to the 2 percent-plus core rate in recent years — robust demand growth, the weak dollar and rising commodity prices — are now running rapidly in reverse,” Ian Shepherdson, United States economist at High Frequency Economics, wrote in a note, “and it is just a matter of time before core inflation starts to head south.”

As prices continue to drop and the housing market continues to stall, some economists are warning of deflation.

Consumers Reducing Debt For First Time Ever

Total U.S. household debt decreased in the third quarter for the first time since record-keeping began. Economists and financial advisers have long warned consumers to curb the ever-increasing amounts of debt taken on by U.S. consumers, and with the help of the weakened economy, they may finally be taking that advice. Continue reading “Consumers Reducing Debt For First Time Ever”