Personal Income Lags but Spending Climbs Sharply

Consumer spending rang up a 0.6% increase in February--the best performance in five months--but personal income managed a mere 0.2% increase and personal savings fell for the month, the Commerce Department reported Thursday.

Separately, initial claims for unemployment benefits in the week ended March 16 slipped to a seasonally adjusted 510,000, down only 9,000 from the previous week’s tally, which was the highest in more than eight years, the Labor Department said.

While the spending figures signaled to some economists that the recession would end soon, others said the income, savings and unemployment data indicated that the economy was still struggling and a recovery was not in sight.

Alison Lynn Reaser, vice president and senior economist at First Interstate Bancorp., thought the reports signaled a recession that is bottoming out. “I would expect to see better numbers on both income and spending as we move forward,” she said.

But Allen Sinai, chief economist of Boston Co., an economic consulting firm, found the reports unreassuring. He thinks they point to a late-year recovery that will be anemic.

“I think American consumers spent beyond their means again in February, spending much more than income could support,” Sinai said. “That simply won’t fly any more.”

Consumer spending on everything from socks to airline travel fuels two-thirds of the nation’s economy, and a slump in spending last fall is largely credited with pushing the economy into recession.

February’s consumer spending, which rose by $11.6 billion, followed a sharp 0.6% drop in January and a 0.1% gain in December, according to the Commerce Department. But the 0.6% improvement in February shrank to a 0.4% gain after adjusting for inflation. Last month’s jump was the biggest since an 0.8% increase in September.

The February gain was propelled primarily by auto sales, while consumption of nondurable goods--such necessities as food and clothing--remained nearly flat.

“Car sales weren’t good in February, but they were abysmal in January,” said David Hensley, acting director of the UCLA Business Forecasting Project.

Personal income inched up 0.2%, while disposable income--after-tax income after accounting for inflation--looked even worse, rising by just 0.1% in February. Disposable income had dropped 0.9% in January.

To finance their spending, Americans dipped into savings, which fell 5.5% to $177.1 billion in February.

“There’s more of a mix to the evidence in February, whereas January and December were just bad--almost scary,” Hensley said. “Overall, I feel better about things than I did a couple of months ago.”

The unemployment claims report for the week ended March 16 indicates that the jobless report for the entire month will be “very bleak,” Sinai said. “The economy isn’t generating jobs, and the jobs aren’t generating income.”

A. Gary Shilling, who heads a Springfield, N.J.-based economic consulting firm that bears his name, said new claims for unemployment benefits show that “the layoffs are continuing.” Service industries are laying off more than normal, which “says to me that we’re probably going to see high levels of unemployment continuing.”

The latest economic signposts follow by only two days a report that consumer confidence had staged a record recovery in March, boosted by U.S. success in the Gulf War.

The Conference Board said Tuesday that its index of consumer confidence rose to 81.0 in March from a revised 59.4 in February. It was the largest monthly gain since the private business research group began its consumer surveys in 1969.

But Sinai thinks the spike, while not surprising, won’t last.

“Jobs and income ultimately call the tune on how we feel about things,” he said. “One month’s uptick in confidence does not indicate a new trend.”

Personal Spending Feb. ‘90: 3.59 Jan. ‘91: 3.71 Feb. ‘91: 3.73

Source: Commerce Department

Personal Income Feb. ‘90: 4.56 Jan. ‘91: 4.72 Feb. ‘91: 4.74

Source: Commerce Department

THE ECONOMY

Consumer spending rose at its quickest pace in five months, and personal income rose slightly, but savings fell and the number of unemployment claims remained high.

THE CHANGES Consumer spending: Up Personal income: Up Slightly Personal savings: Down Unemployment claims: Up Slightly

WHAT DOES IT MEAN?

* The increase in spending reflects renewed consumer confidence that could help lead the economy out of the current recession. However, the modest increase in personal income, the drop in savings and high rate of new claims for unemployment benefits suggest that the slump continued in March.

Source: Commerce Department and Labor Department