- The Washington Times - Thursday, December 25, 2008

The year-long recession continues to deepen as the new year approaches, the latest economic reports confirmed.

First-time claims for unemployment benefits soared to a 26-year high last week, while orders for durable goods declined in November after plunging in October.

Meanwhile, consumer spending declined for a record fifth consecutive month. However, after adjusting for an unprecedented decline in prices in November, price-adjusted consumer spending actually increased.

New jobless claims jumped to 586,000 last week, reflecting a 30,000 jump from the previous week, the Labor Department reported Wednesday. It was the most initial claims since November 1982, when the U.S. economy reached the trough of its deepest post-World War II recession and when unemployment peaked at 10.8 percent.

After shedding 533,000 jobs in November and more than 1.25 million jobs during the September-November period, employers have continued to reduce payrolls at a rapid clip this month. Based on the new jobless claims, December will become the 12th consecutive month that payrolls have declined.

Many economists have recently been predicting that the U.S. unemployment rate, which stood at 6.7 percent in November, would eventually peak near 9 percent by the end of next year.

Last month’s 1 percent decline in orders for durable goods, which the Commerce Department reported Wednesday, was not as bad as economists had been expecting. That indicates business investment may not plummet in the coming months as deeply as many have feared.

A key indicator for the direction of future business investment - the category of non-defense capital goods excluding aircraft - actually increased by 4.7 percent in November after falling 6.6 percent in October.

The Commerce Department reported Tuesday that business investment declined by 1.7 percent during the third quarter. Business spending on equipment and software has fallen three quarters in a row.

“November’s durable goods report was not as bad as feared, a small comfort amid the flood of bleak economic news,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “But with all other evidence pointing to sharp contraction in manufacturing around the world, it is hard to see November’s improvement as anything other than a temporary interruption of a severe downturn that has much further to run.”

Adjusted for inflation, consumer spending had been steadily falling for months. In fact, personal consumption declined during the third quarter for the first time since the 1990-91 recession.

Even though nominal spending by consumers continued to fall in November, a huge decline in consumer prices was responsible for a 0.6 percent rise in price-adjusted spending.

“The increase in real [inflation-adjusted] spending is due to declining prices as opposed to stronger consumption,” said Ryan Sweet, an economist at Moody’s Economy.com. “Therefore, real spending is sending a false signal on the strength of underlying consumption.”

Price-adjusted consumer spending for the fourth quarter will still likely fall by an annual rate between 2.5 percent and 3 percent, according to a projection by IHS Global Insight. During the eight-month recession in 2001, consumer spending did not decline during a single quarter.

As the economy continues to deteriorate, households have increased their savings, which reached 2.8 percent of after-tax personal income in November. In April, the savings rate was zero.

Led by collapsing gasoline and fuel costs, consumer prices fell by 1.1 percent in November, the steepest decline since the Commerce Department began keeping such records in 1992. A key gauge used by the Federal Reserve to measure inflationary pressures registered a 12-month increase of 1.9 percent in November. The indicator has now returned to the Fed’s “comfort zone” between 1 and 2 percent.

Consumer spending has continued very sluggish during December. The International Council of Shopping Centers recently projected that Christmas sales will drop by as much as 2 percent from last year.

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