Washington (Bloomberg) -- U.S. consumer spending rose in January at thefastest pace in four months, as Americans stepped up purchases ofautomobiles, a government report showed. Spending on goods and services increased 0.7 percent during January aftera 0.4 percent rise in December that was larger than previously reported, theCommerce Department said. Incomes grew 0.6 percent after rising 0.4percent the month before. The personal savings rate dropped to its lowestever. The report suggests the U.S. economy started 2001 with momentum. Thatmay ease concern among Federal Reserve policy makers that the lowestconsumer confidence levels in more than 4 1/2 years would lead to weakerspending. February data will give a clear picture of where sales are headed,analysts said. ``The Fed is likely pleased with the consumption figures, but they must betaken with a grain of salt,'' said Christopher Low, chief economist at FirstTennessee Capital Markets in New York. One reason for caution is the labor market. Initial jobless claims surged lastweek, a separate report from the Labor Department showed. Claims rose by39,000 to a level of 372,000 in the week ending Feb. 24. That was thehighest since 375,000 in the week that ended Dec. 30, 2000. U.S. Treasury securities rose for a fifth day today. The 10- year note rose11/32, pushing the yield down 4 basis points to 4.85 percent. Analysts surveyed by Bloomberg News had expected a 0.7 percentincrease in spending for January and a 0.5 percent rise in incomes.Consumer spending drives the U.S. economy because it accounts for two-thirds of all goods and services produced in the nation.
Greenspan
The January spending increase was the largest since a 0.8 percent gain inSeptember. The rise in incomes was the largest since September's 1.1percent gain. The report follows by one day Fed Chairman Alan Greenspan's remarks thatthe U.S. economy has performed better in the past two months than late2000 and that consumer spending has held up better than expected. ``Theexceptional degree of slowing so evident toward the end of the year seemedless evident in January and February,'' he told the House Financial ServicesCommittee yesterday. Economists are looking for signs of whether the pickup in spending, whichaccounts for two-thirds of all goods and services produced in the U.S., willbe sustained. A Conference Board report earlier this week showed thatconsumer confidence in the U.S. economy fell in February to 106.8, thelowest since June 1996. Fed policy makers have been concerned that lowconfidence may translate into weaker spending.
Durable Goods
That didn't happen in January. Spending on durable goods rose 1.9 percentlast month after a 1 percent drop in December. The report said purchases ofautomobiles and parts accounted for most of the gain. General Motors Corp., Ford Motor Co., and other automakers sold 17.2million cars at an annual rate, up from a 15.5-million rate in December thatwas the slowest since 1998. U.S. new vehicle sales in February were on pace to make 2001 the third-best year on record, surpassing forecasts made at the start of the year.Analysts were counting on an annual sales rate of 16.8 million for themonth. ``The weakness in sales of motor vehicles'' has ``been modest, suggestingthat consumers have retained enough confidence to make longer-termcommitments,'' Greenspan said yesterday. The Fed's decision to cutinterest rates a full percentage point in January, which lowered the cost ofauto loans, may have helped keep sales afloat.
Non-Durable Goods
Spending on non-durable goods such as clothing rose 0.6 percent inJanuary after rising 0.1 percent in December. Spending on services, whichmake up more than half of the report, rose 0.5 percent in January after rising0.8 percent in December. Incomes also grew. Disposable income, or the money left over after taxes,rose 0.5 percent in January after rising 0.4 percent in December. Federalpay raises and cost-of-living adjustments accounted for much of the gain. Some consumers may have gained extra income after refinancing theirmortgages at lower rates last month. In mid-January, the Mortgage BankersAssociation of America's refinancing index surged 78.1 percent asborrowing costs fell close to 7 percent. Refinancings, which were thehighest since March 1999, accounted for 64.1 percent of total loan volumein dollars during the week ended Jan. 12.
Savings Rate Falls
The personal savings rate fell to a minus 1 percent, the lowest on record,during January from a negative 0.8 percent in December. The savings rateweighs current income from wages, salaries, businesses and governmentpayments against spending. It doesn't account for borrowed money, incomefrom investments, or withdrawals from prior savings. The rise in spending was accompanied by a pick-up in inflation. Thepersonal consumption expenditures price index, a measure of inflationwatched by the Fed, rose 0.5 percent in January after rising 0.2 percent inDecember. For the fourth quarter, the index rose at a 1.9 percent annualpace, up from a 1.8 percent rate in the third quarter, the government saidyesterday. Gap Inc., the No. 1 U.S. clothing chain, and women's clothing retailerAnnTaylor Stores Corp. cut prices to clear merchandise left over afterdisappointing holiday sales. Dell Computer Corp., the No. 1 maker ofpersonal computers, has been cutting prices to lure customers from rivalsamid slower growth in the PC market.