Consumer spending posts weakest gain in 17 months in February

Saturday, March 29, 2008

WASHINGTON -- Consumers turned in the weakest spending performance in 17 months in February, while their confidence dropped to the lowest level in 16 years, raising further fears of a recession.

The Commerce Department said Friday that consumer spending edged up by just 0.1 percent last month, the poorest showing since September 2006. And if the effects of inflation are removed, spending was flat in February, the third consecutive month of sluggish activity.

Meanwhile, a second report showed the prolonged slump in housing, rising job layoffs, soaring energy costs and a severe credit crisis are taking their toll on consumer confidence. The Reuters/University of Michigan consumer sentiment survey dropped to 69.5 in March.

That was down from 70.8 in February and represented the lowest reading in 16 years, which analysts said was not surprising given all the problems currently battering households.

"Food and energy prices are climbing ever higher, the labor market is slowing, credit is becoming tighter and household wealth is declining as house prices drop," said Nigel Gault, senior U.S. economist at Global Insight. "Consumers are facing bad news on all fronts."

The concern is that all these problems will cause consumer spending -- which accounts for two-thirds of total economic activity -- to weaken even further, bringing on a full-blown recession.

"At the moment, consumers are very pessimistic," said Mark Zandi, chief economist at Moody's "We are losing jobs, the stock market is down, house prices are crumbling, gasoline prices have hit new record highs and it costs a lot more to buy a loaf of bread. Nothing is going well."

Zandi said he believed a recession has already started, but he is still looking for it to be short, ending this summer when 130 million households start spending their rebate checks from the $168 billion economic stimulus package Congress passed last month.

Treasury Secretary Henry Paulson said Friday that the Bush administration is looking for the stimulus checks to give a boost to the economy and jobs.

"These checks should be a big part of adding 500,000 to 600,000 additional jobs this year," Paulson said in an interview with CNN.

President Bush visited a debt counseling center in Freehold, N.J., on Friday to highlight his administration's efforts to help homeowners at risk of defaulting on their mortgages. Democrats said the administration needed to do much more to stem a tidal wave of foreclosures as home prices plunge in many parts of the country.

In its continuing effort to battle the credit squeeze, the Federal Reserve announced Friday that it would provide another $100 billion in short-term loans for commercial banks in two separate auctions in April.

However, Wall Street chose to focus on the bad economic news. The Dow Jones industrial average suffered its third straight decline, dropping 86.06 points Friday to close at 12,216.40.

The spending report showed that incomes grew by a better-than-expected 0.5 percent in February, but the strength came from adjustments made to reflect higher payments from Medicare's prescription drug program, not from strength in wages and salaries.

A key inflation gauge that is tied to consumer spending was up 3.4 percent, compared with February a year ago, reflecting energy and food pressures. Excluding those costs, inflation rose a more modest 2 percent during this period. Analysts said that would give the Fed room to cut interest rates further to battle the weak economy.

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