Waning stimulus hits consumer spending

Waning stimulus hits consumer spending
By Alan Rappeport in New York
Copyright The Financial Times Limited 2009
Published: October 30 2009 13:14 | Last updated: October 30 2009 14:37
http://www.ft.com/cms/s/0/bc09d8e6-c54d-11de-8193-00144feab49a.html


US consumer spending stalled in September after climbing in each of the prior four months, dampening spirits, as the effects of government stimulus programmes started to wane.

Personal consumption expenditures fell by 0.5 per cent, or $47.2bn, last month, commerce department figures showed on Friday. The data were in line with the predictions of Wall Street economists, who expected that the expiration of the popular “cash for clunkers” car rebate scheme would hit spending.

In September, spending on durable goods, which includes cars, fell by 7.2 per cent after jumping by 6.7 per cent the previous month.

Incomes were flat in September, slipping by just 0.1 per cent, after ticking up by 0.1 per cent in August. Companies are continuing to freeze pay or cut salaries as they wait to see the shape of the economic recovery.

“With incomes so soft, increased spending will be a struggle,” said Ian Sheperdson, chief US economist at High Frequency Economics.

Meanwhile, the savings rate rose from 2.8 per cent to 3.3 per cent last month. The savings rate has moderated since last June when it reached a 16-year high of 6.9 per cent.

Consumer spending, which accounts for about 70 per cent of economic output in the US, fuelled economic growth in the third quarter. Official figures showed on Thursday that US gross domestic product grew at an annual rate of 3.5 per cent in the quarter after shrinking in each of the past four.

Economists are anxious to see if consumers, who have been feeling less optimistic in spite of the rebound in economic activity, will be able to sustain spending “organically” without federal support.

Separately, on Friday, the Reuters/University of Michigan consumer survey revealed that confidence slipped in October due to persistent fears that unemployment is unlikely to subside in the near future. The index fell from 73.5 in September to 70.6 this month but was revised up from its preliminary reading earlier this month.

“While off the lows that were recorded when panic and paralysis were the order of the day, this measure of consumer sentiment nonetheless remains severely depressed,” said Joshua Shapiro, chief US economist at MFR.

Richard Curtin, who directs the survey, said that this economic recovery will be different than previous ones because consumers have shifted their spending preferences. Although large purchases such as houses and cars are usually in great demand during times of economic growth this year Americans are more focused on savings and debt reduction.

“These changed preferences are due to the extent of the financial reversals suffered by consumers, which spanned every aspect of their economic lives, as well as the widespread recognition among consumers that it will take years for them to fully recover,” Mr Curtin said.

In October, most consumers said that their finances had worsened and that they expected their incomes to remain flat or to fall in the next year. It was the first time in 60 years that a majority of families polled by the University of Michigan expressed such pessimism.