Spending Flattens, Inflation Continues.

[SirNitram]

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Rising prices are forcing Americans to spend more and save less, even as the growth of income slows.

Consumer spending, which accounts for more than two-thirds of gross domestic product, was flat in January for the second month in a row, when adjusted for inflation, the Commerce Department said on Friday. Other reports showed a decline in consumer confidence and diminished business activity in the Midwest.

Investors absorbed the economic data and pushed stocks lower on negative news from the American International Group, Dell and Sprint Nextel.

The Dow Jones industrials closed down 315.79, or 2.5 percent. The Standard & Poor’s 500-stock index and the Nasdaq composite registered similar percentage declines.

On an absolute level, Americans spent more last month, as spending outlays increased 0.4 percent after rising 0.3 percent in December.

But the products they bought were more expensive, too. Prices are rising rapidly; in January, they were up 3.7 percent in January compared with those a year ago, the fastest rate of growth in more than two years.

Much of the increase comes from the cost of food and gasoline, which has risen sharply in recent months. But prices have risen across the board for products ranging from clothes and medicine to computers and washing machines. Excluding energy and food, inflation is running 2.2 percent above January 2006, faster than the Federal Reserve would prefer.

“Consumers are spending more dollars, but the extra spending is being wiped out by higher prices,” Nigel Gault, an economist at Global Insight in Lexington, Mass., wrote in a research note.

And the squeeze is leaving many Americans financially exposed. For the first time in at least 50 years, Americans spent more than they earned for the third consecutive month. The savings rate fell 0.1 percent in January after dropping 0.1 percent in December and 0.3 percent in November.

Meanwhile, the growth of personal income slowed to 0.3 percent in January after rising 0.5 percent in December. Adjusted for inflation, disposable income ticked up just 0.1 percent for the second consecutive month.

“We know that incomes are growing more slowly, and they’re growing more slowly because of a weakening job market,” said Jared Bernstein, a senior economist at the Economic Policy Institute in Washington.

Americans are well-aware of their plight. Consumer confidence now stands at a 16-year low, according to a survey conducted by Reuters and the University of Michigan. The confidence index dropped to 70.8 in February, the lowest level since February 1992. Consumers also expect inflation to keep rising over the next year.

Businesses are also feeling the pain. A survey of activity at Chicago-area businesses plunged in February, according to the National Association of Purchasing Managers, falling to its lowest level since shortly after the Sept. 11, 2001, terrorist attacks. The group’s “business barometer” reached 44.5 in February after a 51.5 reading the month before. Employment and production levels fell sharply, as well.

[Admiral Valdemar]

Americans have no savings. Really, even if they start now, they'd never catch up to the average European in terms of capital tucked away for a rainy day. The folly of mass consumption every minute of every day without thinking of the future is the foundation of the American model.

[Patrick Degan]

That and transferring as much wealth upward as feasible while paying the middle and working classes shit wages and nickel-and-diming them to death on every necessity.