Video: Consumers keep a tight grip on their money

updated 10/31/2008 11:51:50 AM ET 2008-10-31T15:51:50

Consumer spending in the United States dropped in September by the largest amount in four years, while incomes suffered because of Hurricane Ike.

The Commerce Department reported Friday that personal spending fell by 0.3 percent last month, the biggest decline since June of 2004. That followed flat readings in both July and August, contributing to the worst quarterly performance in 28 years.

Incomes showed a 0.2 percent rise in September, just half of the August increase, a slowdown that partly reflected the adverse effects of Hurricane Ike along the Gulf Coast. The storm cut into rental payments and earnings from businesses affected by the rough weather and its aftermath.

The September spending decline was slightly worse than economists expected and confirmed that the economy hit a wall in the third quarter because of the weakness in consumer spending, which accounts for two-thirds of total economic activity.

The government reported Thursday that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.3 percent in the third quarter, the strongest signal yet that the country was falling into a recession even before the severity of the current financial crisis was fully felt.

With reports showing the ongoing financial crisis has driven consumer confidence to a record low, economists believe consumer spending will remain weak in the current quarter, sending overall GDP down by an even bigger amount. Some analysts are forecasting a drop of 1 to 2 percent in fourth quarter GDP.

"The economy is now navigating through the eye of the storm with recessionary forces intensifying in the fourth quarter," said Brian Bethune, chief U.S. economist at IHS Global Insight.

In a separate report, the Labor Department said Friday that wages and benefits paid to U.S. workers rose by a moderate 0.7 percent in the third quarter, matching the gains in the previous two quarters. It was a further indication that the weak economy was keeping a lid on cost pressures, which will give the Federal Reserve room to cut interest rates further in an effort to keep the country out of a steep economic downturn.

On Wall Street, stocks bounced between slightly negative and slightly positive readings in morning trading as investors slogged through the final day of trading to close out the worst month for the markets in 21 years.

Two consecutive quarterly declines in GDP would meet the classic definition for a recession, although the National Bureau of Economic Research uses different monthly measurements to pinpoint the exact beginning and ending dates for recessions. The bureau has yet to rule that the country is in a recession.

The spending report showed that an inflation gauge tied to spending edged up a small 0.1 percent in September, and posted a 0.2 percent rise excluding energy and food. Prices over the past 12 months are up by 4.2 percent, and have risen by 2.4 percent over the past year when food and energy are excluded.

While core inflation is still rising at levels above the Fed's comfort zone of 1 to 2 percent increases, the central bank is expected to focus on fighting to keep the U.S. out of a severe recession, believing the pressures from inflation will be waning in coming months as energy prices retreat and other costs slow, reflecting the weak economy.

The Fed cut a key interest rate by a half-point on Wednesday to 1 percent, tying the lowest level in the past half-century. Analysts said if the economy remains weak, the Fed could well cut rates again at their last meeting of the year on Dec. 16.

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