Economy Consumer Spending
Mark Lennihan  /  AP
In this file photo, shoppers walk along Fifth Ave. in New York.  The Commerce Department said Monday consumer spending fell for a record sixth straight month in December.
updated 2/2/2009 2:02:09 PM ET 2009-02-02T19:02:09

Consumer spending fell for a record sixth straight month in December as recession-battered households, worried about surging layoffs, boosted their savings rates to the highest level since May.

Economists expect consumer spending, which accounts for the largest portion of total economic activity, to remain weak this year, prolonging an already painful recession.

The Commerce Department reported Monday that personal consumption spending dropped by 1 percent in December. That was slightly worse than the 0.9 percent decline economists expected.

Incomes, reflecting a wave of layoffs, fell for a third straight month, but the 0.2 percent drop was slightly better than expected.

Still, Americans worried about the possibility of more job cuts boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May.

For the year, consumer spending rose by just 3.6 percent, the smallest annual increase since 1961. Incomes rose by 3.7 percent, the weakest gain since a 3.2 percent advance in 2003.

In a sign of how far-reaching the effects of the spending pullback have become, Macy's Inc. announced Monday that it will cut 7,000 jobs, or 4 percent of its work force, and slash its dividend.

The Federal Reserve will provide a reading of just how bad the credit crunch is later Monday with the release of its latest survey showing how many banks are tightening their lending standards for consumers and businesses.

Two other reports released Monday showed recessionary conditions persist in the construction and manufacturing sectors.

Construction spending fell by 1.4 percent in December, reflecting weakness in both residential and nonresidential building, according to the Commerce Department. For the year, construction activity was down a record 5.1 percent as home building plunged by 27.2 percent, the biggest annual decline on records that go back to 1993.

President Barack Obama is pushing Congress to pass an $819 billion economic stimulus package that would include increases for government infrastructure projects such as highways and bridges.

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President Obama said Monday that "very modest differences" should not get in the way of swift congressional passage of the package.

Obama spoke to reporters as he and Vermont Gov. Jim Douglas, the Republican vice chairman of the National Governors Association, were about to meet in the Oval Office about the plan.

Douglas agreed with Obama, saying that a stimulus package is essential to getting the country moving again. Douglas is among the several Republican governors who are breaking with their GOP colleagues in Congress to ask for approval of the plan.

Meanwhile, a key gauge of manufacturing activity edged up slightly in January but still showed contraction for the 12th straight month. The Institute for Supply Management said its manufacturing index rose to 35.6 in January from an all-time low of 32.9 in December. Any reading below 50 indicates contraction in the sector.

American families are struggling with an intensifying recession that's already the longest in a quarter-century. Overall economic growth plunged at an annual rate of 3.8 percent in the final three months of last year, the biggest quarterly decline since a 6.4 percent drop in the first quarter of 1982.

The hard times are being made more severe as consumers cut back sharply on their spending, which accounts for about 70 percent of total economic activity.

The savings rate for all of 2008 rose to 1.7 percent. While historically low, it is well above the savings rates of recent years when soaring home prices and a booming stock market made Americans feel more wealthy and less concerned about saving.

The savings rate had dipped to a low of 0.4 percent in 2005, the peak of the housing boom. That was the lowest annual savings rate in seven decades. Savings had turned negative during the depths of the Great Depression.

For December, the 1 percent drop in consumer spending represented the sixth straight decline, a stretch not seen since the government began keeping monthly records on incomes and spending a half-century ago.

Real consumer spending, which removes the impacts of price changes, dropped by 0.5 percent last month. The smaller drop reflects the impact of falling energy prices.

An inflation gauge tied to consumer spending showed a 0.5 percent fall in December, and excluding the impact of food and energy would have been flat. Over the past 12 months, this inflation measure, excluding food and energy, is up just 1.7 percent, the smallest 12-month change since a similar 1.7 percent rise for the 12 months ending in January 2004.

The 1 percent drop in consumer spending in December came when the nation's retailers reported their worst holiday sales season in at least four decades and automakers struggled with falling demand.

U.S. auto sales plunged by 36 percent in December as automakers continue to struggle with the weak economy. General Motors Corp. and Chrysler LLC were forced to accept a government bailout in an effort to buy time to prepare a new business plan in hopes of avoiding bankruptcy.

Ford Motor Co., which reported a $5.9 billion loss in the fourth quarter, said last week that it still believed it would be able to avoid having to seek government support.

But Ford and a number of other companies including Eastman Kodak Co., Black & Decker Corp., Boeing Co., Pfizer Inc., Caterpillar Inc., Home Depot Inc. and Target Corp. last week announced tens of thousands of new layoffs as they struggle to cope with slowing demand.

More on layoffs stimulus

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