December spending gets a boost


Published: Saturday, February 1, 2003 at 6:01 a.m.
Last Modified: Saturday, February 1, 2003 at 1:13 a.m.

WASHINGTON (AP) - Consumers, lured by a flurry of end of year free-financing deals on cars, boosted their spending in December by 0.9 percent, the largest increase in five months, providing a helping hand to the struggling economic recovery.

The sizable over-the-month increase came after a 0.4 percent advance in November and marked the biggest increase in consumer spending since July, the Commerce Department reported Friday.

Consumer spending accounts for two-thirds of all economic activity in the United States.

Americans' incomes, including wages, interest and government benefits, meanwhile, rose by a solid 0.4 percent in December, up from a 0.3 percent rise the month before. Income growth is important because it provides the fuel for spending in the future.

December's spending and income figures were stronger than analysts were expecting. They were predicting spending to go up by 0.7 percent and incomes to grow by just 0.2 percent.

On Wall Street, stocks were mixed. The Dow Jones industrial average was up 49 points, while the Nasdaq was down 10 points in morning trading.

Even with the good news in December, consumers - the main force keeping the economy going - got tired in the fourth quarter as a whole. That was a major factor in the economy growing at only a 0.7 percent annual rate in the final three months of 2002, the government reported Thursday.

In the fourth quarter, consumers increased their spending at only a 1 percent rate, the worst showing since the first quarter of 1993 and down from a brisk 4.2 percent growth rate in 2002's third quarter.

Worries about a possible war with Iraq, a sluggish job market and a turbulent stock market were factors in the fourth-quarter slowdown.

Still, economists are optimistic consumers will keep their pocketbooks and wallets sufficiently open and help along the economy. Economists believe the economy picked up momentum in the current quarter, growing at a rate of around 2.5 percent or more.

For all of 2002, consumer spending rose by 4.5 percent, matching the increase registered in 2001. Americans' incomes, however, rose by 3 percent in 2002, down from a 3.3 percent advance in 2001, and represented an increase that hasn't been smaller since 1954.

The economy, knocked down by the 2001 recession, has been struggling to get back on sure footing. Economic growth throughout last year was uneven, with a quarter of strength, followed by a quarter of weakness.

President Bush, who doesn't want economic woes to linger as he prepares for his 2004 re-election bid, has proposed a 10-year, $674 billion economic stimulus plan - all but $4 billion involving tax cuts.

Democrats have their own, smaller-scale plans. They argued that the president's plan would do little to help the economy in the short term but would plunge the federal budget into even more red ink.

The Federal Reserve decided Wednesday to hold a key interest rate at a 41-year low of 1.25 percent, hoping that will spur consumers and businesses to spend and invest more, bolstering economic growth.

In December, consumer spending on "durable" goods, such as cars, jumped by 6.1 percent, the largest increase since October 2001, and up from a 0.9 percent rise in November. Free-financing deals and other generous incentives especially on cars were a key factor behind December's rise, economists said.

Spending on "non durables," such as clothes and food and spending on services slowed in December, with each rising by just 0.2 percent in December. The slowdown in nondurable goods was consistent with reports from retailers about dismal holiday sales.

Americans' disposable, or after-tax income, rose by 0.4 percent in December for the second month in a row.

With spending outpacing income growth, the nation's personal savings rate - savings as a percentage of after-tax income - dipped in December to 4.1 percent, from 4.5 percent in November.

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