Consumer spending made up 70% of GDP. Not anymore.

U.S. December Income, Consumption & Prices Fell While Savings Rose

· The personal income & outlays report for the end of 2008 contained news of difficult times for the "front-end" of the U.S. economy. To start, personal income fell for the third straight month. The 0.2% December decline was a bit less-than-expected and it lowered the gain for the full year to 3.7% which was the weakest since 2003. The year ended with December-to-December growth in income of just 1.4% and a three-month drop of 2.6% (AR).

· A 0.3% decline in wages & salaries was in the forefront of that income weakness as employment levels declined. Wages over the last three months were down at a 2.1%rate and up just 2.8% for the full year, half that during 2007. Factory sector wages suffered the worst of the shortfall with an 8.2% three-month rate of decline. In addition, service sector wages fell at a 1.5% rate during those three months which was their weakest performance since the recession of 2001.

· Lower interest rates caused the seventh straight monthly decline in interest income. The -7.2% y/y growth rate was eclipsed, however, by the 22.1% rate of decline during the last three months. Dividend income also fell at a 5.9% rate during that three month period as corporate profits fell.

· Disposable personal income dropped last month for the sixth month in the last seven to lower the three-month change to -2.3%. Thanks to falling energy prices and weaker pricing power generally, real disposable income growth actually increased by a strong 6.7% (1.3% y/y).

· Personal consumption suffered heavily from across-the-board weakness. The December decline was the sixth in a row. While the three-month rate of growth was an abysmal -11.2% (AR), the change in real terms was little better. Real personal consumption expenditures fell 0.5% last month and at a 3.1% during the last three.

· Real spending on discretionary items was notably weak. Motor vehicle & parts purchases fell 0.4% in December and the three-month annual growth rate amounted to -33.1%. Real spending on household furniture & appliances fell at a lesser 4.7% rate while real spending on apparel dropped at a 2.7% rate since September. These and other detailed spending figures are available in Haver's USNA database.


· The silver lining of this weakness in spending is while it reflects weakened income growth, it also produced a rise in the level of savings. The personal savings rate rose last month to 3.6 versus an average of 1.7% for the year, which was the highest since 2004.