Spending sluggish for third month

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A family shops at a Target in Raleigh, N.C. The concern is that, as ongoing problems crunch households, consumer spending will weaken even further, bringing on a full-blown recession.

WASHINGTON - Consumers' spending was the weakest in 17 months in February, while their confidence dropped to the lowest level in 16 years, raising further fears of a recession.

The Commerce Department said yesterday that consumer spending edged up 0.1 percent last month, the poorest showing since September 2006. If the effects of inflation were removed, spending was flat in February, the third consecutive month of sluggish activity.

A second report yesterday showed that the prolonged slump in housing, rising job layoffs, soaring energy costs, and a severe credit crisis are taking their toll on consumer confidence. The Reuters/University of Michigan consumer sentiment survey dropped to 69.5 this month.

That was down from 70.8 in February and was the lowest reading in 16 years, which analysts said was not surprising given all the problems battering households.

"Food and energy prices are climbing ever higher, the labor market is slowing, credit is becoming tighter, and household wealth is declining as house prices drop," said Nigel Gault, senior U.S. economist at Global Insight.

The concern is that all those problems will cause consumer spending - which accounts for two-thirds of total economic activity - to weaken even further, bringing on a full-blown recession.

"At the moment, consumers are very pessimistic," said Mark Zandi, chief economist at Moody's Economy.com, of West Chester. "We are losing jobs, the stock market is down, house prices are crumbling, gasoline prices have hit new record highs, and it costs a lot more to buy a loaf of bread. Nothing is going well."

Zandi said he believed a recession has already started, but he was still looking for it to be short, ending this summer when 130 million households started spending their rebate checks from the $168 billion economic-stimulus package Congress passed last month.

Treasury Secretary Henry M. Paulson Jr. said yesterday that the Bush administration was looking for the stimulus checks to give a boost to the economy and jobs.

"These checks should be a big part of adding 500,000 to 600,000 additional jobs this year," Paulson said in an interview with CNN.

In its continuing effort to battle the credit squeeze, the Federal Reserve said yesterday that it would provide an additional $100 billion in short-term loans for commercial banks in two separate auctions in April.

The spending report showed that incomes grew a better-than-expected 0.5 percent in February, but the strength came from adjustments made to reflect higher payments from Medicare's prescription drug program, not from strength in wages and salaries.

A key inflation gauge that is tied to consumer spending was up 3.4 percent, compared with February a year ago, reflecting energy and food pressures. Excluding those costs, inflation rose a more modest 2 percent during this period.