Consumer Spending Weak, But Inflation Stays Tame

Consumer spending hit a 17-month low in February, hit by the credit crisis, job cuts and soaring energy costs. But a key inflation gauge remained tame.

CNBC.com

The Commerce Department said Friday that consumer spending edged up by just 0.1 percent last month, the poorest showing since September 2006. And if the effects of inflation are removed, spending was flat in February, the third consecutive month of sluggish activity.

The performance of the consumer is closely watched since consumer spending accounts for two-thirds of total economic activity. Economists said the sustained weakness in this area is one of the most worrisome signs that the economy could be tipping into a recession.

The prolonged slump in housing, rising job layoffs, soaring energy costs and a severe credit crisis are taking their toll on consumer confidence. All of these troubles are causing consumers to cut back on their purchases.

The 0.1 percent gain in spending was in line with expectations. Personal incomes rose by a better-than-expected 0.5 percent in February, which was a suprise given that employers cut jobs for a second consecutive month in February.

A key inflation gauge that is tied to consumer spending showed a minuscule 0.1 percent gain in February, after excluding energy and food. Over the past 12 months, this gauge, which is closely watched by the Federal Reserve, is up by 2 percent, putting it back within the Fed's 1 percent to 2 percent comfort zone for core inflation.

The Fed has been aggressively cutting interest rates and taking other unprecedented moves to pump money into the financial system in an effort to keep a severe credit crisis from worsening and bringing on a deep recession.

Many analysts, however, believe that the moves have come too late to prevent the economy from suffering at least a mild downturn, which they believe probably began in the first quarter of this year and will last until this summer when the impact of economic stimulus checks being provided to 130 million households should start boosting consumer spending.

Disposable income, which is what consumers have left after paying taxes, went up by 0.5 percent in February. The personal savings rate, savings as a percent of disposable income, edged up to 0.3 percent, after tipping into negative territory in January.  

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