Consumer spending fell for a record sixth month in a row in December, as mass layoffs, plunging home prices and dwindling retirement accounts made workers feel much poorer.
As credit tightened for homebuyers and commercial builders, construction spending also plunged. That further weakened household incomes as the construction industry shed more than 600,000 jobs last year.
Meanwhile, in one of the first monthly economic indicators of 2009, manufacturing, which shed nearly 800,000 jobs last year, continued to shrink in January, the Institute for Supply Management reported.
The slump in consumer spending and construction will likely continue into 2009 as the yearlong recession promises to worsen, economists said.
Personal income, which fell for the third month in a row, was lower in December than it was in June, the Commerce Department reported. With consumption falling faster than after-tax incomes, household savings have been rising in recent months. Consumers are clearly trying to prepare for harder times ahead.
Personal saving reached 2.9 percent in the fourth quarter, the highest savings rate since the third quarter of 2001 when the economy was also in recession.
However, as households save more for the long term, they are spending less today, and that is aggravating the current recession.
Workers and their families are facing strong head winds.
Last year, prices for existing homes plunged 15 percent, the Standard & Poor’s 500-stock index lost nearly 40 percent of its value and job losses exceeded 2.5 million. As their wealth, confidence and job security were plummeting before their eyes, consumers were frantically reducing their spending throughout the second half of the year.
As a result, personal consumption declined at an annual rate of more than 3.5 percent during the second half of the year. It was the first time since the government began compiling quarterly records in 1947 that consumer spending declined more than 3 percent in consecutive quarters.
The January-March period probably will not be any better. “We expect another 3 percent-plus decline in the first quarter,” said Nigel Gault, chief U.S. economist of IHS Global Insight, a forecasting firm.
Small-business owners saw their incomes fall at a 5.1 percent annual pace in the fourth quarter, noted Mark Vitner, senior economist for Wachovia Economics Group.
“So far, layoffs at big businesses have garnered most of the headlines,” Mr. Vitner said. “The latest income data show that small businesses are hemorrhaging cash, and that could lead to further layoffs in the coming year.”
Last year’s 5.1 percent plunge in construction was led by plummeting home building, which collapsed by 27 percent in 2008.
Exports were a bright spot during the first half of last year, but that’s no longer the case.
“Manufacturing is contracting rapidly, and faces a steep uphill climb as the global recession erodes U.S. exports,” said Ryan Sweet, an analyst at Moody’s Economy.com.