US consumers rein in spending

US consumers rein in spending

Financial Times – Last updated: February 2 2009 16:11

US consumers continued to reduce spending in December in the face of rising job cuts and falling home values.

Personal consumption expenditure fell 1 per cent, slightly more than economists expected, according to commerce department figures released on Monday. The December drop in purchases followed a 0.8 per cent fall the previous month and was a record sixth consecutive decline.

“Such behaviour on the part of consumers is rational given prevailing economic and financial conditions,” said Joshua Shapiro, economist at MFR. Meanwhile the savings rate grew to 3.6 per cent in December, up from 2.8 per cent the month before, as consumers hoard more of their disposable income. US consumers have begun to focus on saving by spending less than they earn, rather than relying upon asset inflation, noted Alan Ruskin, strategist at RBS Greenwich Capital. “The US consumer has got the message,” Mr Ruskin said. Incomes continued to fall in December, with personal income dropping 0.2 per cent, after a 0.4 per cent decline in November. It was the third straight month of falling income, signalling that spending will continue to contract. “With incomes falling and confidence shattered we have to expect spending to keep falling for some months yet,” said Ian Sheperdson, chief US economist at High Frequency Economics. The closely-watched core personal consumption price index remained unchanged in December for the third consecutive month, fuelling continued fears of deflation. A bright note on Monday was evidence that the contraction in the US manufacturing sector showed signs of slowing in January. The Institute for Supply Management’s manufacturing index rose to 35.6 in January, up from 32.9 the month before. The results beat analysts’ expectations, marking the first rise in six months. The increase was driven by a rise in new orders and production from December, but the overall reading remains low and signals a contraction in the sector. Manufacturing has contracted for 12 consecutive months. Construction spending also contracted in December, according to the commerce department, falling by 1.4 per cent from the previous month and 3.6 per cent on the year. The monthly drop was more than expected, fuelled by falling private residential spending, which declined by 3.2 per cent from November to December. Public construction, however, grew in 2008, increasing by 7.4 per cent as the government spent more on schools and highways. Economists expect public construction to continue expanding as an economic stimulus package takes effect later this year. The results on Monday followed last week’s announcement that the US economy contracted by an annualised 3.8 per cent in the final quarter of 2008, a much smaller percentage than expected but still its worst performance since 1982. Copyright The Financial Times Limited 2009

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