Consumer spending down in January

Jeannine Aversa

Monday, March 3, 2003 | 9:50 a.m.

WASHINGTON -- Consumers worried about a possible war with Iraq and their own financial prospects trimmed spending in January -- the first such rollback in four months -- and manufacturing slowed in February, sending a pair of trouble signs for an already struggling economy.

The 0.1 percent cutback reported by the Commerce Department today came after consumers splurged in December, boosting their spending by a sizable 1 percent. End of year financing deals on cars and other big-ticket goods proved too good to pass up.

In January, however, consumers sharply cut spending on such big-ticket "durable" goods -- items expected to last at least three years. And that was the major factor behind the overall drop in spending for the month.

The cutback in spending came as Americans' incomes, including wages, interest and government benefits, went up by a modest 0.3 percent for the sixth straight month in January.

In a more forward-looking report, the Institute for Supply Management's index of manufacturing activity fell to 50.5 in February, slipping markedly from a January reading of 53.9. A level above 50 indicates the manufacturing sector is expanding; below 50 means it's contracting.

Today's report showed that manufacturing barely grew last month, turning in a performance that was significantly weaker than the 52.0 reading analysts were predicting.

Manufacturing -- hardest hit by the 2001 recession -- is the weakest link in the economy's ability to get back to full health.

But the housing sector continues to be one of the economy's strongest pillars as evidenced in another report from the Commerce Department.

Construction spending jumped by 1.7 percent in January to a seasonally adjusted annual rate of $877.9 billion, an all-time monthly high, as builders bet that low mortgage rates would continue to support the housing market.

The increase -- the largest in a year -- followed a strong 1.5 percent advance in December.

Most of January's strength came from residential projects, where spending rose to a record monthly rate of $452.6 billion.

Government spending on big public works projects rose solidly, but spending by private builders on commercial construction, such as office buildings, continued to be weak, a sore spot for the economy.

In the report tracking consumers, both the spending and income figures -- which are not adjusted for inflation -- were weaker than economists were expecting. They were forecasting spending to go up by 0.2 percent and incomes to grow by 0.4 percent in January.

Worries about a war with Iraq, a rollercoaster stock market, a sluggish job market and sinking confidence in the economy are a few of the forces making consumers more cautious.

The 0.1 percent drop in spending in January marked the first and biggest decline since September, when consumers trimmed spending by 0.4 percent.

Unlike businesses, which have been loathe to make big financial commitments, consumers have been the main force keeping the economy going. Their spending accounts for two-thirds of all economic activity in the United States.

If a war were to break out, economists believe consumers initially would sharply cut back on their spending, a force that would slow the recovery.

If the United States were to put a quick and successful end to the war, then consumers and businesses would probably return to more normal buying and investing behavior, helping economic growth. But if a war turns out to be drawn out and severe supply disruptions cause dramatic spikes in oil prices, the economy could be looking at a backslide into recession.

The Federal Reserve is expected to hold short-term interest rates at 41-year lows of 1.25 percent when it meets next on March 18. Fed policy-makers hope that by keeping rates so low consumers and businesses would be more inclined to boost spending and investment, helping along the recovery.

In January, consumers cut spending on "durable" goods, such as cars, by 5.7 percent, the biggest drop since Feb. 1990, and a reversal from the brisk 6.8 percent rise registered in December.

Spending on nondurables, such as food and clothes, went up by 1.3 percent in January, following a 0.4 percent increase. Consumers boosted spending on services, including travel and utilities, by 0.4 percent, up from a tiny 0.1 percent advance in December.

Americans' disposable -- or after-tax income -- rose by 0.3 percent in January, down from a 0.4 percent rise in December.

With income growth outpacing spending, the nation's personal savings rate -- savings as a percentage of after-tax income -- rose from 3.9 percent in December to 4.3 percent in January.

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