NEW YORK (CNNfn) - American's wages and spending rose in December, while personal savings slipped to an all-time low, finishing a year in which consumer spending -- the spark plug of the economy's gains -- posted its strongest annual showing in a decade.|
Personal income rose 0.3 percent in December, while spending gained 0.8 percent, the Commerce Department said, both in line with forecasts compiled by Briefing.com. Meantime, the amount Americans put aside in savings reached an all-time low of 1.5 percent, using the department's recently revised benchmark for calculating the personal savings rate.
The reports coincide with the U.S. economy's longest period of uninterrupted expansion in history -- 107 months as of Tuesday -- and a day before Federal Reserve policy makers meet in Washington to discuss how to cool the white-hot economy without snuffing it out.
"Clearly, the best news on inflation is past," said Steven Wood, a senior economist with Banc of America Securities in San Francisco. "These data show that households were spending aggressively last year and that there is a great deal of spending momentum coming into 2000. The Fed needs to tighten now, and they will."
Cause for inflationary concern
All told, the numbers painted a picture of U.S. households spending well beyond their means and not putting enough away for a rainy day -- particularly during the latest holiday shopping season. Consumer spending accounts for more than two-thirds of U.S. economic output and has been one of the principal drivers of the economy through the latter half of the 1990s.
For the year, income gained 5.9 percent, and spending jumped 6.9 percent, the strongest yearly gain since a 7.2 percent jump in 1989. The savings rate rang in at a record low of 2.4 percent using the Commerce Department's revised measure.
Some market experts are suggesting that record-low savings rates and high debt could potentially derail the U.S. economy.
Speaking to CNNfn in Davos, Switzerland, at the World Economic Forum Monday, Securities and Exchange Commission Chairman Arthur Levitt warned investors about borrowing excessively to finance stock purchases and other investments. (324KB WAV) (324KB AIFF)
From the Federal Reserve's point of view, strong consumer spending has become a prominent problem as consumers, with newly found income from rising stock and real estate values, borrow against their assets to buy goods -- even when their salaries are not rising.
Most analysts expect the Fed's policy arm to raise short-term rates at the conclusion of its two-day meeting Wednesday. The Fed raised rates three times last year in an effort to slow the economy by making borrowing more expensive. The Fed funds rate, currently at 5.5 percent, sets the trend for consumer and commercial lending among the nation's banks.
Strong consumer spending
"The consumer sector has been among the strongest in the economy and I think that's the area that (Fed Chairman Alan) Greenspan and company are really worried about," Michael Moran, chief economist with Daiwa Securities, told CNNfn just after the numbers were released.
There is a reason for that. The jobless rate is currently at a 30-year low of 4.2 percent and is expected to have remained there in January, according to analysts polled by Briefing.com. The Labor Department will release January's job figures on Friday.
That is making consumers much more confident about their potential for income in the future, which in turn affects how they have been spending their money. At the same time, prices for goods and services in demand have remained stable, a product of rising productivity among U.S. factories and competition from overseas.
A separate report released Monday by the National Association of Purchasing Management-Chicago showed that its Chicagoland Business
Barometer fell to a seasonally adjusted 55.6 in January from a revised 56.0 in December. An index below 50 signals a slowing manufacturing economy and a reading above 50 suggests expansion.