U.S. Consumer Spending Rises After Six Straight Drops

By Courtney Schlisserman

March 2 (Bloomberg) -- Consumer spending rose in January for the first time in seven months as Americans took advantage of post-holiday discounts that hurt retailer profits.

The 0.6 percent increase was larger than anticipated and followed a 1 percent decrease in December, the Commerce Department said today in Washington. Measures of inflation eased over the last year.

The advance is likely to be short-lived as the biggest employment slump since the end of World War II and record foreclosures shake consumer confidence. President Barack Obama is trying to stem what may become the worst recession in seven decades with a stimulus plan that the administration estimates will create or save 3.5 million jobs and with mortgage initiatives.

“I don’t think we are at the point yet where we can reasonably expect to see consistent increases in income and spending,” said David Resler, chief economist at Nomura Securities International Inc. in New York. Still, “it’s putting us off to a better start in the first quarter than some had assumed.”

Futures on the Standard & Poor’s 500 Stock Index fell 2 percent to 719.50 at 8:39 a.m. in New York, while benchmark 10- year note yields slipped to 2.95 percent from 3.02 percent on Feb. 27.

Pay Increases

Economists forecast spending would increase 0.4 percent according to the median of 62 estimates in a Bloomberg News survey. Projections ranged from a drop of 0.4 percent to a gain of 0.8 percent.

Personal income climbed 0.4 percent, pushed up by pay increases to government employees and cost-of-living adjustment to federal transfer payments. Salaries and wages fell 0.2 percent, a third consecutive decrease.

Disposable income, or the money left over after taxes, increased 1.5 percent after adjusting for inflation, the most since May.

The price gauge tied to spending patterns increased 0.7 percent from January 2008, down from a 0.8 percent increase in the 12 months ended in December. The Fed’s preferred gauge of prices, which excludes food and fuel, climbed 1.6 percent from a year earlier, the smallest gain since December 2003.

Adjusted for inflation, spending increased 0.4 percent. Price-adjusted purchases of durable goods, such as autos, furniture, and other long-lasting items, rose 0.2 percent. Purchases of non-durable goods climbed 0.7 percent, and spending on services, which account for almost 60 percent of all outlays, rose 0.3 percent.

‘Very Tentative’

J.C. Penney Co., the third-largest U.S. department-store chain, on Feb. 20 forecast its first quarterly loss in almost five years. The company said it’s cutting inventory and halving the number of new stores it will open this year to contend with lower spending on clothing, jewelry, linens and rugs. Sales dropped 9.9 percent in the three months ended Jan. 31.

“The customer’s very tentative,” Chief Executive Officer Myron Ullman said on a conference call. “They’re buying what they need and they’re being very smart about how they spend their money.”

The savings rate climbed to 5 percent, the highest level in almost 14 years. A positive rate indicates consumers are earning more than they are spending.

Obama’s Plans

Obama’s stimulus package includes tax cuts for most U.S. families and allocates billions of dollars toward cities to rebuild crumbling infrastructure while creating jobs. Last month he also introduced a plan to help as many as 9 million people restructure their mortgages to avoid foreclosure.

Federal Reserve Chairman Ben S. Bernanke last week said the U.S. economy is in a “severe” contraction and warned the recession may last into 2010 unless policy makers can stabilize the financial system.

The economy contracted at a 6.2 percent annual rate in the fourth quarter, the weakest reading since 1982, the Commerce Department said on Feb. 27. Consumer spending fell at a 4.3 percent pace, the most in almost three decades.

Economists at Morgan Stanley in New York last week projected the economy would shrink at a 5.9 percent pace in the first three months of the year. That would make the six months through March the worst two quarters since 1957-1958.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net