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Consumer income and spending rise in December

Saturday, February 1, 2003

WASHINGTON -- Americans boosted their spending in December by the largest amount in five months as end-of-year financing deals and other incentives on cars and other big-ticket items proved too good to pass up.

The Commerce Department reported Friday that consumer spending jumped by 0.9 percent in December from November, when spending rose 0.4 percent. December's increase, the largest since July, provided a helping hand to the struggling economy.

Consumer spending accounts for two-thirds of all economic activity in the United States.

Americans' incomes, including wages, interest and government benefits, meanwhile, rose by a solid 0.4 percent in December, up from a 0.3 percent rise the month before. Income growth is important because it provides the fuel for future spending.

On Wall Street, blue-chip stocks rose. The Dow Jones industrial average closed up 108.68 points at 8,053.81.

December's spending and income figures were stronger than analysts expected. They were predicting spending to go up by 0.7 percent and incomes by just 0.2 percent.

Even with the good news in December, consumers -- the main force keeping the economy going -- got tired in the fourth quarter as a whole. That was a major factor in the economy's growth at only a 0.7 percent annual rate in the final three months of 2002, the government reported Thursday.

In the fourth quarter, consumers increased their spending at only a 1 percent rate, the worst showing since the first quarter of 1993 and down from a brisk 4.2 percent growth rate in 2002's third quarter.

Worries about a possible new war, a sluggish job market and a turbulent stock market were factors in the fourth-quarter slowdown.

'Held up well'

Still, economists are optimistic that consumers will keep their pocketbooks and wallets open wide enough to prevent the economy from backsliding into recession. Economists believe the economy picked up momentum in the current quarter, growing at a rate of around 2.5 percent or more.

However, war with Iraq would no doubt chill consumers' appetite to spend, economists warned.

For all of 2002, consumer spending rose by 4.5 percent, matching the increase registered in 2001.

"Household spending held up well last year despite a hiring drought," said Maury Harris, chief economist at UBS Warburg.

Americans' incomes rose 3 percent in 2002, a slowdown from 2001's 3.3 percent advance, as the dismal job market took its toll on workers. Last year's income growth matched the gain posted in 1958 and was weaker only in 1954.

The economy, knocked down by the 2001 recession, has been struggling to get back on sure footing. Economic growth throughout last year was uneven, with a quarter of strength, followed by a quarter of weakness.

President Bush, who doesn't want economic woes to linger as he prepares for his 2004 re-election bid, has proposed a 10-year, $674 billion economic stimulus plan -- all but $4 billion involving tax cuts.

Democrats have their own, smaller-scale plan. They argued that the president's plan would do little to help the economy in the short term and would plunge the federal budget into even more red ink.

The Federal Reserve decided Wednesday to hold a key interest rate at a 41-year low of 1.25 percent, hoping that will spur consumers and businesses to spend and invest more, which would bolster economic growth.

In December, consumer spending on durable goods, such as cars, jumped by 6.1 percent, the largest increase since October 2001, and up from a 0.9 percent rise in November. Free-financing deals and other generous incentives, especially on cars, were a primary factor behind December's rise, economists said.

"The incentives were stronger," said Paul Taylor, chief economist at the National Automobile Dealers Association. Besides free financing, companies offered delayed payments, no down payments and cash incentives, he said.

Spending on nondurables, such as clothes and food, and spending on services slowed in December, with each rising by just 0.2 percent in December. The slowdown in nondurable goods was consistent with reports from retailers about dismal holiday sales.

Americans' disposable, or after-tax, income rose by 0.4 percent in December for the second month in a row.

With spending outpacing income growth, the nation's personal savings rate, or savings as a percentage of after-tax income, dipped in December to 4.1 percent, from 4.5 percent in November.

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On the Net: Spending and income report: www.commerce.gov/


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