Shoppers pinch pennies; jobless claims mount
Posted on Friday, February 1, 2008
Consumer spending in the U. S. increased at the slowest pace in six months and filings for unemployment insurance jumped, according to reports issued Thursday, spurring bets that the Federal Reserve will need to keep reducing interest rates.
Purchases rose 0. 2 percent in December after a 1 percent gain the month before, the Commerce Department said Thursday in Washington. The Labor Department said jobless claims rose to a 27-month high last week, though the figures may have been distorted by adjusting for holidays, a spokesman said.
Treasuries advanced, stocks slid, and odds that the Fed will cut rates another half-point to 2. 5 percent by March rose to 68 percent, futures showed.
Consumers, who have helped the economy weather the worst housing recession in a quarter century, may further rein in their spending after declines in home and stock values, gains in fuel costs and reduced access to credit, economists said.
“With job growth slowing and gasoline prices remaining very high, consumer spending is likely to post very meager gains over the next couple of months,” said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, N. C. The argument that the Fed is being too aggressive in lowering rates “is now off the table,” he said.
A measure of U. S. business activity fell this month from a six-month high as new orders and employment slowed, a private report also showed Thursday.
The National Association of Purchasing Management-Chicago’s business barometer fell to 51. 5 from 56. 4 a month earlier. Figures greater than 50 signal growth.
Economists had forecast a 0. 1 percent increase in spending after an originally reported 1. 1 percent gain in November, according to the median of 73 estimates in a Bloomberg News survey.
“Consumers are becoming more cautious,” said Nigel Gault, chief U. S. economist at Global Insight Inc. in Lexington, Mass., who accurately forecast the spending gain. “We expect the Fed to continue to cut interest rates as it battles recession risks.”
The Commerce report also showed that incomes rose 0. 5 percent after a 0. 4 percent gain the prior month. Incomes were projected to rise 0. 4 percent, the same as in November, according to the survey median.
The Fed’s preferred measure of inflation rose 0. 2 percent for a third straight month. It increased 2. 2 percent from December 2006, the same as in November.
Fed policymakers on Wednesday lowered the benchmark interest rate by half a point, eight days after an emergency threequarter-point reduction, the fastest easing in monetary policy since 1990. “Downside risks to growth remain,” and the central bank will “act in a timely manner as needed,” officials said.
Initial applications for unemployment insurance rose 69, 000 to 375, 000 in a week when data may have been distorted by adjusting for the Martin Luther King Jr. holiday Jan. 21, a Labor Department spokesman said. The number of people staying on benefit rolls rose to 2. 716 million in the week ending Jan. 19 from 2. 669 million in the prior week.
“These are levels that are indicative of a recession,” James Caron, global head of interestrate strategy at Morgan Stanley in New York, said in a Bloomberg Television interview. “If the trend continues to be high jobless-claims numbers like this, it’s going to really add some validity to the expectations that the U. S. is, in fact, in a recession at this time.”
A recession is defined as two consecutive quarters of negative gross domestic product growth. Fourth-quarter growth in 2007 was estimated at 0. 6 percent; for the third quarter, growth was determined to be 4. 9 percent, according to Commerce Department figures.
The Labor Department’s January employment report will come out for a second month, the highest in two years. Employers probably hired 70, 000 workers after adding 18, 000 in December, according to the Bloomberg survey.
Adjusted for inflation, spending stalled in December, after a 0. 4 percent gain the prior month, the Commerce Department said. For all of 2007, consumer spending rose 5. 5 percent, the smallest gain in four years.
Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 0. 2 percent, from zero. A positive rate suggests consumers are rebuilding savings.
Conditions in the labor market will determine whether spending ultimately falters, economists said. Information in this article was contributed by Alan Ohnsman and Courtney Schlisserman of Bloomberg News.
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