Spending, manufacturing data point to more pain

WASHINGTON – Consumer spending and incomes rose more than expected at the start of the year, but the gains were seen as fleeting in light of the recession and the waves of layoffs battering Americans.

Two other reports Monday on manufacturing and construction also showed little reason for optimism. Analysts said any start to an economic rebound is at best months away, with the most pessimistic predicting a sustained recovery won't begin until next year.

Wall Street plunged anew after a sobering earnings report from American International Group showed the insurance giant lost $61.7 billion in the fourth quarter, the biggest quarterly loss in U.S. corporate history. In response, the government unveiled a revamped rescue package that will provide AIG with another $30 billion in taxpayer money if needed.

The Dow Jones industrial average fell below 7,000 for the first time in 11 years. The credit crisis and recession have slashed more than half of the Dow's value since it hit a record-high over 14,000 in October 2007. The Dow lost nearly 300 points to 6,763.29.

The Commerce Department said consumer spending rose 0.6 percent in January, the first increase after a record six straight monthly declines, and slightly better than the 0.4 percent rise economists had expected.

Incomes also showed more strength than expected, rising 0.4 percent, although that gain came primarily from annual pay raises for federal workers and a 5.8 percent cost-of-living increase for the 50 million people receiving Social Security benefits.

Private sector wages and salaries, the key component of incomes, actually fell for a fifth straight month. That reflected the wave of layoffs occurring as the recession, already the longest in a quarter-century, intensifies.

Employers cut a net total of 598,000 jobs in January, the most in more than three decades, as the unemployment rate shot up to a 16-year high of 7.6 percent. Economists and the government expect the jobless rate will keep rising in the months ahead.

Because of all the problems facing the economy, the January rebound in consumer spending was not seen as the start of an upward trend.

"Household wealth continues to fall rapidly, employment is falling steeply and consumer sentiment is at or near all-time lows. These are not the ingredients of a consumer recovery," said Nigel Gault, chief U.S. economist at IHS Global Insight.

While many analysts believe the $787 billion economic stimulus program President Barack Obama pushed through Congress last month, along with his efforts to combat mortgage foreclosures and stabilize the banking system will yield a recovery starting in the second half of this year, others say such forecasts are far too optimistic.

With workers worried about losing their jobs, the personal savings rate jumped to 5 percent in January, the highest since 1995. The total saved during the month — $545.5 billion — represented the largest amount on records that go back 50 years, though the dollar totals are not adjusted to reflect inflation.

The government calculates the savings rate as a percentage of after-tax incomes. While overall incomes rose just 0.4 percent in January, after-tax incomes shot up a much larger 1.7 percent. That increase, which outpaced the 0.6 percent rise in spending, propelled the rise in the savings rate.

Sung Won Sohn, a finance professor at the Martin Smith School of Business at California State University, said he did not see a recovery beginning until 2010 since the $700 billion financial system bailout has yet to get credit flowing to consumers and businesses.

"People can't buy houses, cars and furniture because they can't get credit," he said. "Credit markets are looking for some certainty and right now all they are seeing is the government lurching from one crisis to another without any overall blueprint on how they will resolve the problems in the financial markets."

Since consumer spending accounts for about 70 percent of total economic activity, the economy will not rebound until consumers reopen their pocketbooks, economists said. The overall economy, as measured by the gross domestic product, shrank at a 6.2 percent rate in final three months of last year, the worst showing in a quarter-century.

Sohn said he believed the GDP would fall at a 4.5 percent rate in the current quarter with further declines throughout 2009.

In other economic news, the Institute for Supply Management's closely watched gauge of manufacturing activity showed contraction for a 13th straight month in February. The reading of 35.8 was up slightly from the prior month, but the index remains at levels signaling a severe recession.

And manufacturing layoffs persist. Steel alloys and bearings maker Timken Co. said Monday it planned to cut 400 salaried jobs, about 2 percent of its work force, as the Canton, Ohio-based company reduces costs to match a slowing market for its products.

A third report showed that construction spending plunged more than twice as much as expected in January, a decline of 3.3 percent that was the fourth straight monthly drop. Residential construction, where the economy's troubles began more than two years ago, dropped 2.9 percent while nonresidential construction fell 4.3 percent, the biggest decline since January 1994. Analysts predicted further weakness in construction as developers find it increasingly difficult to get financing.

The January increase in consumer spending, which followed six straight declines, was driven by a sharp rise in food and other nondurable goods as retailers offered big discounts to clear shelves following a dismal holiday shopping season. Durable goods posted a much smaller gain as Americans again avoided spending on cars and other large items.

The economic weakness is keeping a lid on inflation. A price gauge tied to consumer spending showed a modest increase of 0.2 percent in January after three straight monthly declines that reflected sharp drops in energy costs. Excluding food and energy, the price gauge rose 0.1 percent in January and has risen only 1.6 percent in the last 12 months.

But the new year has brought little relief for retailers. J. Crew Group last week announced that it was cutting 95 jobs and suspending its 401 (k) plan through the rest of the year as part of an effort to contain costs. Macy's Inc. and J.C. Penney Co. last month each reported a drop of more than 50 percent in fourth-quarter earnings.