It’s been a terrible day globally for markets, especially on Wall Street, as investors took fright at the health of banks and insurers.

But amid the usual flow of data and surprise reports, like AIG’s record $US61 billion quarterly loss and the insurer’s third bailout from Washington, there were one or two bits of information that told us something about the intensity of the recession.

US consumer spending rose 0.6% in January, and personal income also rose in the same month, both surprising on the upside. But Americans also boosted their savings to the highest level since 1995 as they hunkered down to ride out the recession.

On the face of it that looks odd: spending more and saving more.

Construction spending fell sharply, driven lower by the continuing weakness in residential construction.

The figures came after another poor month for US manufacturing which showed the recession persisted for a 13th month in February as sales orders and employment were again weak.

The Institute for Supply Management’s index (ISM) was 35.8 compared with 35.6 in January. Readings less than 50 signal a contraction.

That surge in savings: now 5%, according to the Commerce Department figures, is the best indicator of the way US consumers are battling the slump.

Personal savings rose $US128.7 billion in January to $US545.5 billion. The personal savings rate (expressed as a percentage of disposable personal income), jumped to 5% from 3.9% in December.

The rise in consumer spending reversed six straight months of falls, but it wasn’t the rise that was important, it was that the extra money was spent in January as hundreds of thousands of people lost their jobs.

US personal income also rose in the same month, a surprise considering the same factors at work. Much of this was due however to higher wages for defence workers and cost of living changes in government welfare payments.

The main driver behind the rise was a 1.3% increase in purchases of non-durable goods led by much higher spending on food.

More significant purchases of durable goods, such as cars etc, posted a tiny 0.1% increase, as Americans continued to ignore cars, furniture, whitegoods and other big ticket items. Seeing as car sales fell 37% in the month, the small increase was on other durable goods (and durable goods orders were weaker overall).

While the 0.6% rise in consumer spending was the largest since May, it was due to the start-of-year adjustments for Federal employees, rather than higher income for private sector employees.

Inflation is not a worry, the PCE index (the Fed’s inflation gauge of choice) showed a rise of just 0.2% in January after three straight monthly declines that reflected the sharp fall in oil prices. Excluding food and energy, the price gauge rose 0.1% in January and was up only 1.6% in the year to the end of that month.

The 0.4% increase in personal incomes came after two months of falls and in a month when 598,000 jobs were lost and the unemployment rate jumped to a 16-year high of 7.6%.  The rise in personal income followed a decline of 0.2% in December and the market had been looking for another 0.2% fall.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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