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Spending: Lowest rise in 47 years

Consumption down for 6th straight month in December, while personal income slips 0.2%.

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By David Goldman, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Consumers continued to retrench in December, capping off the worst year for consumer spending since 1961, according to a government report released Monday.

A Commerce Department report showed spending by individuals fell 1% last month, after dropping a revised 0.8% in November. Economists surveyed by Briefing.com had forecast a 0.9% drop.

"The report shows that consumers are in a mood to rebuild their savings but not to go out and spend," said Mark Vitner, economist at Wachovia. "Generally that's a good thing, but not when everyone does it at the same time."

December marked the sixth-straight month in which consumers cut back on their spending, a decline that accelerated dramatically in the last three months. For the fourth quarter, spending fell a record 8.9% - the worst quarter for spending since the Commerce Department began tracking that statistic in 1947.

Spending for the full year rose just 3.6%, the lowest increase in 47 years.

That's a particularly troubling sign for the economy, because consumer spending accounts for more than two-thirds of the nation's gross domestic product. Accordingly, the Commerce Department said GDP fell by 3.8% in the fourth-quarter, the sharpest decline in 26 years.

As a result, the Senate is set to vote this week on an $888 billion stimulus plan, including about $275 billion in tax cuts aimed at boosting consumer spending.

The report also included the so-called core PCE deflator - a key reading closely watched by the Federal Reserve that measures prices paid by consumers for goods and services other than food and energy. It showed a 1.7% rise from year-earlier levels, below the 1.9% posted in November.

Half of December's consumer spending declines were due to falling prices as inflation continues to moderate - especially on falling oil and gas prices. But Vitner said as gas begins to creep up in price, consumer spending may actually rise in the coming months as well.

Personal income falls

Personal income fell 0.2% in December, following a revised 0.4% drop in the previous month. Economists had forecast another 0.4% decline.

"It's somewhat surprising that income was not down by that much, given how much job loss there has been," Vitner said. "What that indicates is that given all the headlines about big businesses cutting jobs, we could be looking at even a bigger problem at small businesses."

Still, the drop in prices far outpaced the decline in personal income, leading to a modest 0.3% rise in real income in the period.

Also because income fell less than spending fell, consumers posted a savings rate of 3.6%. That means the average household saved $3.60 on every $100 of after-tax income, compared with $2.80 in November.

The American savings rate had been near zero for quite some time, but has been creeping up since the summer as consumers curtailed their spending.

But some say the savings rate may be a bit deceiving.

"The savings rate's positive attributes may not be all that positive," Vitner said. "It doesn't mean they're actually putting in a in a savings account - it probably means folks may just not have any money left to spend." To top of page

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