Video: White House eyes economy

updated 3/28/2008 11:54:48 AM ET 2008-03-28T15:54:48

Consumers, jolted by a credit crisis, job cuts and soaring energy costs, turned in the weakest spending performance in 17 months in February, further evidence that the risks of a recession are increasing.

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.

The performance of the consumer is closely watched since consumer spending accounts for two-thirds of total economic activity. Economists said the sustained weakness in this area is one of the most worrisome signs that the economy could be tipping into a recession.

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, the lowest reading in 16 years and down from 70.8 in February.

“Consumers are facing bad news on all fronts,” said Nigel Gault, an economist with Global Insight. “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.”

While many economists believe the economy has slid into a recession, they still expect it will be short and mild, ending this summer when 130 million U.S. households start spending their rebate checks.

Treasury Secretary Henry Paulson said Friday that the administration is looking for the $168 billion economic stimulus package focused on tax rebate checks to give a boost to the economy in coming months.

“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.

Wall Street rebounded on Friday with the Dow Jones industrial average up more than 30 points in late morning trading.

The 0.1 percent gain in spending was in line with expectations. Personal incomes rose by a better-than-expected 0.5 percent in February, which was a surprise given that employers cut jobs for a second consecutive month in February.

A key inflation gauge that is tied to consumer spending showed a minuscule 0.1 percent gain in February, after excluding energy and food. Over the past 12 months, this gauge, which is closely watched by the Federal Reserve, is up by 2 percent, putting it back within the Fed’s 1 percent to 2 percent comfort zone for core inflation.

The Fed has been aggressively cutting interest rates and taking other unprecedented moves to pump money into the financial system in an effort to keep a severe credit crisis from worsening and bringing on a deep recession.

Disposable income, which is what consumers have left after paying taxes, went up by 0.5 percent in February. The personal savings rate, savings as a percentage of disposable income, edged up to 0.3 percent, after tipping into negative territory in January.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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