Consumer spending cutbacks hurting economy

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WASHINGTON (AP) -- Americans are rapidly shifting from spendthrifts to savers, slowing the broader economy, as they remain wary in the face of rising layoffs.
New economic reports Thursday suggest this dynamic won't change anytime soon. Retail sales and orders for manufactured goods fell. And the number of people claiming jobless benefits remained near record highs. The government is expected to report Friday that the unemployment rate rose again in February, with employers cutting nearly 650,000 jobs.

Consumers' growing frugality has hammered automakers, among other industries. General Motors Corp.'s auditors on Thursday raised "substantial doubt" about the auto giant's ability to continue operations, and the company said it might have to seek bankruptcy protection, sending its shares below $2.

Bill Hampel, chief economist for the Credit Union National Association, said his group's members are reporting record increases in deposits. Government figures show the savings rate jumped to 5 percent in January from zero last spring. That's the highest rate since 1995 and a much faster shift than he had expected, Hampel said.

Consumer spending makes up about 70 percent of the economy. It topped out at 71 percent in 2005, Hampel said, but will likely drop by 2 to 3 percentage points over the next few years.

Increased savings can actually lower economic growth. Economists call it the "paradox of thrift": What's good for each of us individually -- being thrifty, limiting our spending -- can worsen a recession when everyone does it all at once.

"I wish I could say the rise in the savings rate is over," said Stuart Hoffman, chief economist at PNC Financial Services Group Inc., who thinks it will keep increasing until late this year.

Hoffman said about half the 6.2 percent drop in economic output last quarter, the worst showing in a quarter-century, was attributable to lower consumer spending.

The stock market plummeted on GM's announcement and the bad economic news. The Dow Jones industrial average dropped 281 points, or 4 percent, while broader indices fell at similar rates.

Several economists said government spending, particularly President Barack Obama's $787 billion stimulus plan, is likely to be the only source of growth in the coming months. Other drivers of the economy, such as business investment, are likely to decline further.

"Everything except government spending is falling," Hampel said.

The Congressional Budget Office said earlier this week that gross domestic product, the broadest measure of the economy, will be 1.4 to 3.8 percent higher by the final quarter of this year than it would be without the stimulus.

The Obama administration this week also unveiled details of a housing plan designed to make it easier for about 9 million people to pay their mortgages. A record 5.4 million homeowners -- nearly 12 percent of those with a mortgage -- were at least a month behind on their payments or in foreclosure at the end of last year, according to a report Thursday from the Mortgage Bankers Association.

That's up from 10 percent at the end of the third quarter and up from 8 percent at the end of 2007.

Retailers from Target Corp. to American Eagle Outfitters Inc. to Macy's Inc. reported Thursday that their sales fell last month, though in many cases not as sharply as expected. Wal-Mart Stores Inc. was one bright spot as the discount giant's same-stores sales, which measures sales at stores open at least one year, rose 5.1 percent.

Separately, the Commerce Department said demand for manufactured products dropped 1.9 percent in January. That was smaller than the 3.5 percent drop economists had expected, but it was the sixth consecutive monthly fall -- the longest such stretch on records dating back to 1992.

The weakness in January included a big plunge in orders for transportation equipment. That reflected the continued troubles of automakers struggling with the lowest sales in decades.

As demand for all types of goods dries up, companies are laying off workers at a furious pace. The Labor Department said the number of new claims for jobless benefits dropped last week to 639,000 from 670,000 the previous week.

The 639,000 new claims were fewer than analysts had projected. But the four-week average of new claims, which smooths out fluctuations, rose to 641,750 -- the highest since October 1982, when the economy was emerging from a steep recession. The labor force, though, has grown by about half since then.

The number of people claiming benefits for more than a week fell slightly to 5.1 million in the latest report, after rising to record-highs for five straight weeks.

But an additional 1.4 million people were receiving benefits under an extended unemployment compensation program approved by Congress last year. That tally was as of Feb. 14, the latest data available, and brings the total jobless benefit rolls to about 6.5 million -- more than double the 2.8 million who were receiving benefits a year ago.

The Labor Department is expected to report Friday that the unemployment rate rose to 7.9 percent last month as employers cut a net total of 648,000 jobs. In January, the unemployment rate jumped to 7.6 percent, the highest in more than 16 years, while employers cut 598,000 jobs.

In a separate report that bodes ill for employees, the department said Thursday that worker productivity slid more than expected in the fourth quarter, while wage pressures shot up at the fastest clip in two years.

The department said productivity, the amount of output per hour of work, fell at an annual rate of 0.4 percent in the October-December period. At the same time, unit labor costs surged 5.7 percent. That likely will put more pressure on companies to lay off workers to cut costs, economists said.

More job losses were announced this week. General Dynamics Corp. said Thursday it will cut 1,200 workers, due partly to plummeting sales of business and personal jets.

Telecommunications equipment maker Ciena Corp. said it will lay off about 9 percent of its employees, or 200 workers, as it posted a steep first-quarter loss. Los Angeles-based aerospace company Northrop Grumman Corp. said it will lay off 750 people, mostly in southern California.

Many economists think the unemployment rate is likely to keep rising to as high as 10 percent by the end of the year.