Following yet another dismal economic report, the U.S. stock market showed solid gains by mid-afternoon. At 2 pm, the Dow Jones Industrial Average (9,368) had gained 187 points (2 pecent); the Standard & Poor’s 500 stock index (975) was up 21 points (2.2 percent); and the Nasdaq composite index (1,731) increased 33 points (1.9 percent).
Consumer spending, adjusted for inflation, fell again in September, marking the third decline in four months, the Commerce Department reported Friday morning. Personal income after taxes edged upward last month, following three steep monthly declines.
Consumer spending declined sharply in September, as most of the critical cyclical drivers of spending were weak, including employment levels and the growth of wages and salaries, said Brian Bethune, U.S. economist for IHS Global Insight. Spending was
also negatively impacted by further tightening in credit conditions and sharp declines in household net worth.
Before declining 0.4 percent in September, consumer spending had fallen 0.2 percent in June, 0.6 percent in July and remained flat in August.
Today’s report on consumer incomes and outlays for September confirmed Thursday’s economy-wide quarterly report, which revealed that a 3.1 percent fall in consumer spending during the July-September period caused a 0.3 percent drop in gross domestic product (GDP), the broadest measure of economic activity.
The economy is now navigating through the eye of the storm, with necessary forces intensifying in the fourth quarter of 2008, Mr. Bethune said.
The drop in consumption during the third quarter marked the first quarterly decline since 1991. It was the steepest fall in consumer spending since the second quarter of 1980, when the imposition of credit controls in response to soaring inflation forced consumers to retrench in a drastic way.
Not even the very deep 1981-82 recession included a decline in consumption as steep as the Commerce Department reported for the third quarter of this year. Unemployment, which peaked at 10.8 percent in late 1982, was 6.1 percent last month.
The [September] weakness in real consumer spending means the fourth quarter began in a very weak position, said Mark Vitner, senior economist at the Wachovia Economics Group. October was likely another difficult month, and forecasts for the holiday shopping season are exceptionally cautious.
Compared to a year ago, spending on durable goods, such as automobiles, appliances and other goods expected to last three years or more, was down 7.4 percent in September. Spending on nondurable goods, including gasoline, clothing and food, was 1.4 percent lower last month from its year-earlier level.
The third quarter’s annualized 6.4 percent decline in the consumption of nondurable goods was the steepest quarterly drop since 1950.
Households have been battered by plunging home values, the stock market swoon and stagnant incomes. Tightened credit standards have made matters worse for consumers.
From their peak in July 2006, home values have declined more than 20 percent, according to the S&P/Case-Shiller U.S. National Home Price Index. In some metropolitan areas, home prices have declined by more than 35 percent from their peaks. Meanwhile, the broad-based S&P 500 stock index has shed more than 35 percent of its value since the beginning of the year and is down nearly 40 percent from its peak last October.
The median household income in 2007, $50,233, was lower than its 2000 level of $50,557. The median income is that income precisely in the middle of the income stream. Half the incomes are higher, and half are lower.
In recent months, personal income after taxes has been pounded. Before rising 0.1 percent in September, it had fallen 2.5 percent in June, 1.6 percent in July and 1 percent in August.
If the level of consumer confidence is any indication, consumer spending is unlikely to pick up any time soon. According to the latest University of Michigan/Reuters index, which was released Friday morning, U.S. consumer sentiment suffered a record decline in October, plummeting from 70.3 in late September to 57.6 in late October. The Conference Board reported earlier this week that consumer confidence in October had plunged to its lowest level in the 41 years the statistic has been calculated.
A key gauge of inflation, a consumption-based price index that excludes the volatile food and energy sectors, increased by 0.2 percent in September for the second month in a row, the Commerce Department reported. It has risen by 2.4 percent over the past 12 months, slightly slower than the 2.5 percent pace for the 12 months ending in August. To achieve long-term price stability, the Federal Reserve tries to maintain this price index between 1.5 percent and 2 percent.
Given the dramatic slowdown in the economy, however, the Fed’s fear of inflation has subsided significantly.
In the Fed’s Wednesday statement announcing that it had lowered its target interest rate to 1 percent, the central bank’s policy committee declared, In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate in coming quarters to levels consistent with price stability.
Another government report on Friday provided further evidence that the threat of inflation has abated. The Labor Department reported that its employment cost index increased 0.7 percent in the third quarter.
Slow economic growth and a weak labor market continue to weigh on wages and salaries, commented Ankia R. Khan, an economist at Wachovia Economics Group. The Fed still has the green light to ease as labor inflation pressure should not present a problem.
Meanwhile, in overseas stock trading Friday, Asian markets were down. Japan’s Nikkei 225 Stock Average lost 5 percent of its value after soaring more than 25 percent during the previous three days. The gain followed the decision by Japan’s central bank to lower its target interest rate from 0.5 percent to 0.3 percent. Earlier this week, the Federal Reserve lowered its target short-term interest rate from 1.5 percent to 1 percent.
China’s Shanghai Composite Index lost 2 percent Friday. For all of October, the Chinese stock index lost 25 percent of its value. The Hong Kong Hang Seng Index fell 2.5 percent Friday.
In European stock trading Friday, London’s FTSE 100 index closed after gaining 2 percent. France’s CAC 40 index was up 2.3 percent, and Germany’s DAX index increased 2.4 percent.
Thursday, the Dow Jones Industrial Average gained 2.1 percent to close at 9,181; the S&P 500 was up 2.6 percent and closed at 954; and the Nasdaq gained 2.5 percent to close at 1,699.