Dec 26, 2008

Lifestyle - Americans curb spending as income declines

WASHINGTON: American incomes and spending contracted in November as recession took a heavy toll on the world’s biggest economy, the Commerce Department has said.

In the first decline in four months, personal income contracted 0.2 per cent in November, surprising analysts who had expected no change.

Consumption expenditures shrank 0.6 per cent in the month before Christmas, its fifth consecutive decline, it said. But after adjusting for inflation and taxes, real disposable income in November increased 1.0 per cent, a second consecutive large monthly rise, and real personal consumption expenditure rose 0.6 per cent, the first monthly rise since May and the largest monthly increase since December 2006.

“Though the increase in real spending and income is encouraging, it is being driven by sharp declines in prices,” said Ryan Sweet, a senior economist with Moody’s

An accelerating decline in prices in recent months has stoked fresh concerns about deflation — the pernicious downward spiral of falling prices and weakening growth that is difficult to counter.

“Household finances are still tight, and consumers are attempting to repair their balance sheets by saving more. The savings rate will trend higher, at the expense of spending,” said Mr. Sweet.

Still, the break in the downward trend in real spending “implies a softer fourth quarter consumption decline than previously estimated, a bit of solace in a quarter of rapidly falling economic activity,” said Peter Kretzmer, senior economist with Bank of America.

“We now estimate that consumer spending is falling at a 1.8 per cent annualised pace this quarter [versus a drop of 3.8 per cent in the third quarter],” he said.

Personal income, which tracks income from all sources, is the largest component of total income, comprising wages and salaries estimated using payrolls and earnings data.

The United States is facing prolonged recession after a housing mortgage crisis sparked financial turmoil across the globe and caused a severe economic downturn.

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