Finally there is a little tidbit of good news. Everyone has been focused on December GDP data, January home starts and existing home sales, and weekly unemployment filings. As you know those numbers have been pretty bleak. Well, this morning the Commerce Department announced that in personal spending in the US rose 0.6% in January compared to the month before. In December, consumption fell by 1.0%, and in November it fell by 0.8%. But wait, that's not the end of the story. Personal income increased at a seasonally adjusted rate of 0.4% in January. In December, income fell by 02.%. This was better than the economists predicted. When they were surveyed by the Dow Jones folks, they forecasted a 0.3% decrease in personal income during January, with a 0.4% gain in consumer spending.
There are two obvious conclusions. People have been scared for the past several months and spent considerably less than normal -- even during the holidays. This allowed for an increase in the savings rate. The 3.9% of personal savings percentage of disposable income in December grew to 5.0% in January, which at a level not usually seen among American consumers. Then once increased savings gave consumers more of a feeling of security, they slowly began spending again. Why is this important?
Although we are still waiting for the impact of massive government spending promised by the American Recovery and Reinvestment Act, realize that 70% of our economy has been traditionally driven by consumer spending. Until about 10 to 15 years ago, future potential consumption largely depended on the size and stability of a person's income and the amount of their savings. Since then that factor has been almost completely replaced by the difference between credit card balances and the related credit limits. With the current credit crisis, future consumption will be relatively more dependent upon those factors which led to our country's expansion as was seen by previous generations.
Although one month's positive data does not mean a trend, these numbers may be significant. Equity markets are still attempting to find a bottom. As of this moment, the Dow Jones Industrial Average is down about 170 points and below the magical 7,000 level. A significant sell off is usually a precondition for the start of a recovery rally. Once it happens, a sustained market upswing should predict the end of the recession is nine months away -- which also means that every month will be better than the last.
Friday's announcement that the fourth-quarter GDP fell by 6.2% -- more than expected may also be good news. Typically, as in the 1982 recession, there is a tremendous down-turn of the GDP. This is followed by the next quarter showing a decline, but considerably less. This is where the excitement lies. During second quarter after the trough, normally GDP rises tremendously. So, if the fourth-quarter was the current recession's trough, we should see a lesser decline when the figures come out for the current quarter. However, if history repeats, by the time that GDP data for the current comes out, we should be in a quarter with an economic growth spurt. The current banking restructuring and re-capitalizing should be well on its way, the financial stimulus from government spending should start being felt, the credit markets should resume functioning, and consumers, bolstered by their increased savings and a turn around in job market, consumers will once again hit the stores and the car dealers -- and the real estate market.
If you think that Armageddon has struck, hold on. Flowers may not be the only thing blooming this Spring and Summer.
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These just some of the valuable ideas in my new e-book, Getting Back Your Life: Surviving the Great Depression of 21st Century. I wrote this specifically for people undergoing the stress of the current economy and who need to get their lives back under control - and prevent this from happening again. Get your copy today.