The drop in consumer spending, the economy’s key driver, means little help is in sight for struggling retailers, homebuilders and automakers.
The fallout spread Monday when Macy’s Inc. announced it would cut 7,000 jobs, almost 4 percent of its work force, and take other belt-tightening measures to cope with the drop in sales.
“It is going to be hard to get the economy going again,” said Nigel Gault, chief U.S. economist for IHS Global Insight of Lexington, Mass.
“We are very much reliant on whatever help the government can provide through the stimulus package and through the efforts of the Federal Reserve and the Treasury Department to help the financial system.”
Personal consumption spending dropped 1 percent in December, a sixth consecutive decline that represented the longest stretch of weakness in a half-century of record keeping. Spending had declined 0.8 percent in November, even worse than first reported, the Commerce Department reported.
Separately, the Fed reported that banks were making it harder for borrowers to obtain all sorts of loans over the last three months despite the government’s $700 billion bailout program. Nearly 60 percent of banks responding to the Fed’s new survey said they had tightened lending standards on credit cards and other types of consumer loans.
Greg McBride, senior financial analyst at Bankrate.com, says banks — whose lax lending standards for home mortgages contributed to the financial meltdown — are in no rush to loosen lending standards.
“Even when lenders come back to the marketplace and become willing to lend again, who they lend to is not going to change,” McBride said. “Lenders won’t go back to giving out credit like candy anytime soon.”
Incomes, reflecting an accelerating tide of layoffs, fell for a third straight month in December. The 0.2 percent drop followed a 0.4 percent fall in November that was worse than initially reported, the Commerce Department reported.
Consumers increasingly are reining in spending and instead saving more of their pay. The personal savings rate rose to 3.6 percent in December and averaged 1.7 percent for the full year. That was nearly three times the 0.6 percent savings rate for all of 2007 and far above the seven-decade low of 0.4 percent for savings hit in 2004, a year buoyed by a booming housing market.
The situation is now reversed. Housing prices, the biggest asset for most Americans, continue to plunge, and a severe financial crisis has roiled Wall Street, wiping out trillions of dollars in stock wealth.
With Americans desperate to rebuild savings and with the deepening recession raising their fears of layoffs, analysts said it’s no surprise the savings rate is rising.
Since consumer spending accounts for about 70 percent of total economic activity, the cutbacks are battering the economy, which plunged at an annual rate of 3.8 percent in the final three months of last year, the biggest drop in 26 years. The weakness was led by a 3.5 percent fall in spending which followed a 3.8 percent drop in spending in the July-September quarter.
It marked the first back-to-back declines in consumer spending since the 1990-91 recession and represented the biggest consecutive declines in spending in more than six decades.
Gault predicted that consumer spending would continue falling in the months ahead, leading to a GDP decline of 5 percent in the current quarter. He said he expected the recession will last until late 2009. The slump, already the longest in a quarter-century, would be the longest since World War II if it lasts into the summer.
The deepening recession and cutbacks in consumer spending are being cited by the Obama administration as it lobbies Congress to quickly pass a massive economic stimulus program. The House version, which won approval last week without a single Republican vote, would total $819 billion in spending and tax cuts over two years. The version the Senate took up Monday would total $900 billion.
The Bush administration allocated the first half of the bailout money, leaving $350 billion to be distributed by the new administration. Obama’s team has said it will overhaul the program to meet widespread criticism that not enough restrictions had been imposed on banks that are getting government support to make sure they use the aid to boost lending.
For all of 2008, 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.
Two other reports released Monday showed recessionary conditions persist in the construction and manufacturing sectors.
Construction spending fell 1.4 percent in December, reflecting weakness in both residential and nonresidential building, according to the Commerce Department. For the year, construction activity dropped a record 5.1 percent as home building plunged 27.2 percent, the biggest annual decline on records that go back to 1993.
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.
On Wall Street, stocks were mixed. The tech-heavy Nasdaq composite index rose, but the Dow Jones industrial average and Standard & Poor’s 500 index both slipped.