Falling gas cost frees up money

November increase in consumer spending is seen as bright spot

December 25, 2008|By New York Times News Service

Tumbling gasoline prices gave consumers more purchasing power last month, which led to a rise in real consumer spending even as personal income slips and Americans worry about their jobs in a rapidly weakening economy.

The Commerce Department reported yesterday that consumer spending, when adjusted for inflation, rose 0.6 percent in November, its largest gain in two years.

The increase followed a 0.5 percent decline in October.

And while the unadjusted rate of consumer spending declined 0.6 percent in November, on the heels of a 1 percent drop in October, economists suggested that the relative increase in spending was a rare piece of good news for the faltering economy.

"The declines in gasoline prices have been extremely large, larger than anything we've seen in the past," said Dean Maki, chief U.S. economist at Barclay's Capital.

"That's providing a lot of spending power to households."

Gasoline prices have plunged to an average $1.66 a gallon from their July peak of $4.11 as Americans drove less, construction projects were halted and the global appetite for oil waned in the economic slowdown.

Filling up a 15-gallon tank now costs about $25, compared with $60 last summer.

"It's a very substantial amount of money that's been freed up," said Abiel Reinhart, North American economist at J.P. Morgan Chase. "That's a definite positive for consumers. It's probably the only positive at this point."

American retailers are braced for bruising holiday season results as Americans bargain-hunt and trim their budgets. Many retailers have slashed their earnings outlooks for the coming year and are offering deep discounts and "doorbuster" sales simply to entice shoppers into their stores.

Households continue to save more money as many Americans adjust to stagnant wages and reduced working hours and prepare for possible layoffs. The Commerce Department reported that personal savings increased 1 percent in November compared with 0.7 percent in October.

Personal incomes dropped by 0.2 percent last month after increasing 0.1 percent in October.

Meanwhile, weekly jobless claims continued to hit new highs, reflecting a bleak picture for American workers. Unemployment has risen 6.7 percent this year, and employers cut 533,000 jobs in November.

The Labor Department reported yesterday that the number of people filing for unemployment insurance for the first time rose to 586,000 in the week ending Dec. 20, up from a revised 556,000 a week earlier.

"The labor markets remain weak, that's the clear message," Maki said.

America's manufacturing sector marked another weak month, with new orders to factories for durable goods falling 1 percent to $186.9 billion, the Commerce Department reported yesterday.

While it was the fourth consecutive month of declines, the drop was much smaller than Wall Street's expectations of a 3 percent decline.

Helping to drive down that November number was a 37.7 percent drop in demand for commercial aircraft.

Industrial production has declined 5.5 percent so far this year, as automotive assembly lines shut down and home construction grinds to a near-standstill.

The country's production of cars, machinery, furniture, appliances and a range of other goods has tumbled this year, according to Federal Reserve data. Many officials expect the economic downturn to continue through 2009, and they say that unemployment could reach 8 percent to 10 percent.

The Commerce Department reported Tuesday that the economy shrank by 0.5 percent from July to September.

Economists say the economy is now contracting at an annual rate of 4 percent to 6 percent.

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