Consumer spending fell for the first time in three months while income growth slipped for a second straight month, indicating that the economy is still struggling to emerge from the recession.
The Commerce Department reported Thursday that consumer spending dropped by 0.2 percent in March, worse than the 0.1 percent decline that economists had expected.
Incomes, reflecting the continued massive wave of layoffs, dropped by 0.3 percent, worse than the 0.2 percent dip that had been expected.
Disposable incomes, the amount left after paying taxes, were flat in March. The personal savings rate edged up to 4.2 percent of after-tax incomes in March, compared to 4 percent in February. The level for the savings rate marked a significant change from near zero a year ago. Households have been cutting back on spending and boosting savings during the current hard times, worried that they need to replenish depleted nest eggs in the face of massive job layoffs.
The 0.2 percent drop in spending was the first decline after two consecutive increases. Spending shot up by 1.1 percent in January, the largest monthly jump in nearly five years, but that increase followed six straight monthly declines as consumers slashed outlays in the face of a deepening recession.
The fact that spending turned negative again in March was a worrisome sign about future economic prospects. Consumer spending in the first quarter of the year grew at a 2.2 percent annual rate after two consecutive quarters of declines.
However, many economists believe that spending will dip back into negative territory in the current April-June period, further delaying a rebound from the current recession. Economists closely watch consumer spending because it accounts for 70 percent of total economic activity.
A price gauge tied to consumer spending showed a modest 0.2 percent increase, excluding food and energy, and a 1.8 percent increase over the past year. The country's deep recession, on its way to becoming the longest in the post World War II period, has dampened price pressures.
The Federal Reserve, which last December slashed a key interest rate to near zero in an effort to fight the downturn, announced on Wednesday that it would keep rates low for the foreseeable future and was prepared to keep employing other means in an effort to jump-start the economy.
The overall economy, as measured by the gross domestic product, fell at an annual rate of 6.1 percent in the first three months of the year after a 6.3 percent plunge in the fourth quarter. It marked the worst back-to-back declines in GDP in a half century.
Even with the expectation that consumer spending could turn negative again in the second quarter, economists are looking for the GDP decline to slow to perhaps a 3 percent fall, reflecting the fact that businesses will not be slashing inventories at such a rapid pace as they did in the first three months of the year. Analysts are looking for GDP to be only slightly negative in the third quarter and then turn slightly positive in the fourth quarter of this year as the recession finally comes to an end.
The main reason economists have gloomy expectations about spending are the continuing massive job layoffs, which are continuing.
In recent announcements, Textron said it will expand its announced layoffs by 2,100, eliminating a total of 8,300 jobs, or 20 percent, of its global work force as the recession weakens demand for corporate planes. The maker of Cessna planes, Bell helicopters and turf-maintenance equipment earlier this year said it would reduce its work force by 6,200 jobs mostly at Wichita, Kansas-based Cessna.
General Motors laid out a massive restructuring plan this week that includes cutting 21,000 U.S. factory jobs by next year.