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Silver lining of shrinking economy: consumer spending up

Economic activity in the US plunged 6.1 percent in the first quarter of this year, but free-fall in consumer spending stopped.

By Staff Writer / April 29, 2009

Economic activity in America plunged again in the first quarter of the year, but positive signs in one key indicator – consumer spending – could foreshadow economic stability later this year.

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Overall, the nation’s output of goods and services declined at an annual rate of 6.1 percent in the period of January to March, according to preliminary numbers released Wednesday by the Commerce Department. That was almost as bad as the fourth quarter of last year, but the report showed a crucial difference.

Where consumer spending tanked in the fourth quarter, it held up in the most recent period with a 2.2 percent annualized gain.

That sign of resilience was punctuated earlier this week, as a separate survey released Tuesday showed a solid rise in consumer confidence.

The implication, many economists say, is that the second quarter should see a smaller drop in gross domestic product (GDP), with stabilization or modest growth improvement after that.

“Probably the worst is behind us in terms of rates of decline,” says Jay Bryson, an economist at Wachovia Corp. in Charlotte, N.C. “Certainly by the fourth quarter I would think you’re going to start getting some positive growth numbers.”

A US recession was already well under way by last fall, but it accelerated as turmoil in financial markets caused an unusually sharp pullback in consumer activity.

Consumer spending fell at a 3.8 percent pace in the third quarter and a 4.3 percent pace in the fourth quarter.

Since consumer spending represents about two-thirds of GDP, the turnaround so far this year could signal a welcome transition for the whole economy out of panic mode.

It’s not that Americans are going hog-wild for new houses or Harley Davidsons, however. In the first quarter, shoppers were buying goods at a pace that was still down when measured against the beginning of 2008.

But, compared to the previous quarter, their spending rose at an annual rate of above 2 percent.

“Perhaps that’s starting to stabilize,” Mr. Bryson says. “It all really depends, at the end of the day, on what happens to real disposable income.”

Rising unemployment rates represent a hit to personal incomes, but Bryson notes that spending power is being buoyed now by modest new tax cuts and cooler inflation. Falling energy prices acted as a kind of income boost for the first quarter of 2009, for example.

Barring a new hit to the economy (he cites the current need to control swine flu), Bryson expects that consumer spending will continue to rise this year and next, albeit at a more temperate pace such as 1 percent.