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Consumer spending anemic in December

Consumers increased their spending at the weakest pace in six months while applications for unemployment benefits soared last week, two more signs the economy is weakening.
/ Source: The Associated Press

Consumers increased their spending at the weakest pace in six months while applications for unemployment benefits soared last week, two more signs the economy is weakening.

The Commerce Department reported Thursday that consumer spending edged up just 0.2 percent in December — the year’s peak shopping season — down sharply from a 1 percent gain in November. It was the weakest performance in this area since a similar 0.2 percent rise in June of last year.

Meanwhile, the Labor Department reported that the number of laid off workers filing applications for unemployment benefits soared by 69,000 to 375,000. That was the highest level for jobless claims since the week of Oct. 8, 2005, when the economy was dealing with the disruptions caused by Hurricane Katrina and the other Gulf Coast hurricanes.

The increase in jobless claims was more than triple what economists had been expecting although part of the increase was blamed on technical difficulties in adjusting the figures around the Martin Luther King Jr. holiday.

But private economists said they believed the figure was accurately pointing to a weakening in the job market that reflects the significant slowdown in the overall economy. Ian Shepherdson, chief U.S. analyst at High Frequency Economics, said he believed the underlying level of jobless claims currently is around 350,000, an indication of a deteriorating labor market.

The unemployment rate rose significantly in December, going up to 5 percent from 4.7 percent in November. That was the biggest one-month increase since the period immediately following the September 2001 terrorist attacks. The January unemployment figure will be reported on Friday.

The weakening jobs market is keeping labor cost pressures contained. The Labor Department’s Employment Cost Index posted a 0.8 percent rise in the final three months of last year. Wages and salaries were up 0.8 percent and benefit costs, which include health insurance and pensions, rose by 0.9 percent.

The 0.2 percent rise in consumer spending looked even worse when price changes were removed. Inflation-adjusted spending did not increase at all last month, following a 0.4 percent rise in November and a 0.1 percent decline in October.

The report on spending confirmed earlier reports by retailers that last year was the worst year for holiday spending in five years as consumers, worried about the economy and hit by tighter credit, a wave of home foreclosures and soaring energy prices, sharply reined in their shopping despite the best efforts of retailers to boost sales with discounted merchandise.

The Federal Reserve on Wednesday cut a key interest rate by a half-point, the second large move in less than a week as the central bank signaled it was prepared to do whatever is needed to combat the weakening economy.

The Senate is working to follow the lead of President Bush and the House in developing an economic stimulus package to speed rebate checks to millions of homes in an effort to prop up consumer spending and ward off a recession — or at least make it a short and mild downturn.

The report on consumer spending showed that personal incomes rose by 0.5 percent in December, the best showing since a similar increase in September.

An inflation gauge tied to spending that is closely watched by the Federal Reserve posted a 0.2 percent rise in December and left prices, excluding energy and food, up by 2.2 percent over the past 12 months, slightly higher than the 2 percent upper bound of the Fed’s comfort zone.