Inflation-adjusted consumer spending turns in weakest 2-month showing since Hurricane Katrina

Published 5:15 pm Friday, February 29, 2008

Consumer spending was essentially flat for the second straight month in January, raising new concerns about a possible recession.

The Commerce Department said Friday that spending posted a 0.4 percent rise in January, which was better than economists had been expecting. However, all of that gain came from a surge in inflation during the month. Taking away the effect of prices, spending showed no gain in January or December.

Other than two negative months in August and September of 2005, which reflected the disruptions from Hurricane Katrina, inflation-adjusted consumer spending has not been so weak since November and December of 2001, when the country was struggling to emerge from the last recession.

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Incomes in January posted a 0.3 percent increase following a 0.5 percent gain in December. However, the January performance was boosted by a number of one-time factors, such as big annual bonuses paid to business executives.

A closely watched gauge of inflation that is tied to consumer spending posted a 0.4 percent increase in January and was up 3.7 percent over the past 12 months, the biggest year-over-year gain since September 2005.

While the 0.4 percent rise in consumer spending before accounting for inflation was larger than had been expected, it is inflation-adjusted spending that is used to compute overall economic growth.

A flat reading in this category in December and January means that last year ended and the new year began on an exceedingly weak note, since consumer spending accounts for two-thirds of total economic activity.

Many economists believe that the country will slip into a recession this year, if the downturn has not already started. They are predicting that the slump will be a mild one and will end by midyear when the rebate checks from the recently passed $168 billion economic stimulus package start showing up in mailboxes.

More optimistic analysts believe it is still possible that the country will skirt by without a full-blown recession. President Bush told reporters on Thursday that he did not think the country was in a recession.

Federal Reserve Chairman Ben Bernanke signaled in congressional testimony this week that the Fed, which aggressively cut interest rates in January to try to stave off a recession, is prepared to cut rates further to shore up the economy.

The Fed’s efforts may be constrained by a new surge in energy prices with oil jumping to a record this week above $102 per barrel.

Bernanke said the Fed is watching inflation carefully but at the moment believes that the threat from weak economic growth outweighs the risks from higher inflation.