WASHINGTON — Buffeted by soaring fuel prices and tighter credit, consumers increased their spending at the weakest pace in six months. In other signs of trouble, applications for unemployment benefits last week soared by the largest number since Hurricane Katrina.
The Commerce Department reported Thursday that consumer spending edged up just 0.2 percent in December — the year's peak shopping season. That was down sharply from a 1 percent gain in November. It was the weakest performance in this area since a similar 0.2 percent rise in June of last year.
Meanwhile, the Labor Department reported that the number of laid-off workers filing applications for unemployment benefits increased by 69,000 to 375,000 last week. That was the highest level for jobless claims since the week of Oct. 8, 2005, when the economy was dealing with the disruptions caused by Hurricane Katrina and other Gulf Coast hurricanes.
The increase in jobless claims was more than triple what economists had been expecting, although part of the increase was blamed on technical difficulties in adjusting the figures around the Martin Luther King Jr. holiday. Analysts said the greater concern was the slowdown in consumer spending, which they predicted would continue in the current quarter, the period many believe will be the maximum danger point for a recession.
The overall economy, as measured by the gross domestic product, slowed to an anemic growth rate of 0.6 percent in the final three months of 2007, half of what had been expected, and many analysts believe it could dip into negative territory in the current quarter. By one definition, a recession occurs when GDP is negative for two consecutive quarters.
David Wyss, chief economist at Standard & Poor's, said he was forecasting that GDP would decline at an annual rate of 1 percent in the current quarter, in large part because of the expected further slowing in consumer spending, which accounts for two-thirds of economic activity.
"Happy holidays is not a phrase that retailers are using to describe this year's shopping season," said Joel Naroff, chief economist at Naroff Economic Advisors.
Despite widespread discounting, retailers slogged through their weakest Christmas sales season in five years as consumer confidence was shaken by the deep slump in housing, a severe credit squeeze and last year's big increases in the cost of gasoline and other energy products.
On Wall Street, stocks ended a turbulent January with a huge advance on Thursday as investors grew more optimistic that the aggressive intrest rate cuts by the Federal Reserve will help rescue the economy. The Dow Jones industrial average rose 207.53 points to close at 12,650.36. For the month, thd Dow lost 4.63 percent.
The unemployment rate rose significantly in December, jumping to 5 percent from 4.7 percent in November. That was the biggest one-month increase since the period immediately following the September 2001 terrorist attacks.
The January jobless number will be released Friday, with analysts expecting it will be unchanged at 5 percent as payroll growth continues to be sluggish with an expected increase of around 65,000 jobs.
The weakening jobs market is keeping labor cost pressures contained. The Labor Department's Employment Cost Index posted a 0.8 percent rise in the final three months of last year, a moderate increase that matched the rise in the July-September period.
The Fed on Wednesday cut a key interest rate by a half-point, the second large move in less than a week as the central bank signaled it was prepared to do whatever is needed to bolster the weakening economy.
President Bush and House leaders reached quick agreement on an economic stimulus plan last week. However, the package has slowed in the Senate where the Senate Finance Committee gave approval to an expanded effort on Wednesday despite warnings by the administration that this could risk delays in getting tax relief in the hands of families.
Treasury Secretary Henry Paulson, who is leading the administration's negotiations with Congress, told reporters Thursday that he was concerned that the extra Senate provisions would create "a real risk that the process will bog down and slow our efforts to get money into the economy."
The 0.2 percent rise in consumer spending looked even worse when price changes were removed. Inflation-adjusted spending did not increase at all last month, following a 0.4 percent rise in November and a 0.1 percent decline in October.
The government said personal incomes rose by 0.5 percent in December, the best showing since a similar increase in September.
An inflation gauge tied to spending that the Federal Reserve watches closely posted a 0.2 percent rise in December and left prices, excluding energy and food, up by 2.2 percent over the past 12 months, slightly higher than the 2 percent upper boundary of the Fed's comfort zone.
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