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Spending Flat, but Inflation Bites Income

From Reuters

Consumer spending was unchanged in October as Americans’ incomes failed to keep up with inflation for the third straight month, the Commerce Department said Thursday.

The report provided fresh evidence that a key engine of growth has sputtered to a halt as the economy dips into a recession, economists said.

Personal income rose a fractional 0.1% from September levels, but after accounting for inflation consumer spending power fell 0.5%.

It was the third straight month that real income fell.

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Consumer spending, which pays for two-thirds of all goods and services produced in the United States, was virtually unchanged, the department said.

“These numbers are consistent with the beginning of a recession,” said David Jones, senior economist at Aubrey G. Lanston & Co. in New York.

The government’s chief economic policy-maker, Federal Reserve Chairman Alan Greenspan, told Congress on Wednesday that the nation’s economy was shrinking but skirted the issue of whether it was in recession.

“What we’re looking at is a gradual decline which, if it persists, will give us a fourth-quarter GNP which is negative,” Greenspan said.

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The gross national product, the measure of all goods and services, has been growing since November, 1982.

If the GNP shrinks in the current quarter, as Greenspan predicts, and continues to fall in the first quarter of next year, the economy will have met the widely accepted definition of a recession.

The income rise last month was the smallest since August, 1989, when there was no income gain at all. The last time spending was flat was in May.

Price rises, especially for gasoline and other oil products, since Iraq invaded Kuwait on Aug. 2, have steadily eaten into personal incomes and sapped spending power.

Wages and salaries fell $9.3 billion in October to a seasonally adjusted annual rate of $2.74 trillion--the first drop in the figure since November, 1989, when it fell $7.6 billion.

Personal income rose last month by $5.7 billion to a rate of $4.71 trillion, but only because of small gains in income from sources like rents, farming and government payments.

Consumer spending was flat at an annualized rate of $3.73 trillion.

“Since August, the economy has really lost its ability to generate income,” said Peter Greenbaum of Smith Barney, Harris Upham & Co. in New York. “You’re finally beginning to see this translate into outright drops in consumption spending.”

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Little of the money is going into increased savings.

Consumers saved in October at an annual rate of $151 billion, up from $145 billion in September, the department said. That meant consumers saved only 3.8% of their income after taxes, not much different from the 3.6% they put aside in September.

“It’s ridiculously low,” said David Wyss of DRI/McGraw Hill Inc. in Lexington, Mass.

He pointed out that consumers historically have saved 7% of their incomes and saved 4% to 5% for most of the free-spending 1980s.

Jean Sundrla, an economist with Evans Economics Inc. in Washington, also was struck by the low savings.

“What are people doing with their money? Are they paying off debts?” Sundrla said. “We should be seeing a big rise in the savings rate, and we’re not.”


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