updated 11/1/2004 10:37:39 AM ET 2004-11-01T15:37:39

Consumers, who substantially slowed down their spending in late summer, roared back to life in September, boosting their purchases by 0.6 percent. The gain in spending reported Monday by the government far outpaced the increase in incomes.

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The Commerce Department attributed the spending surge to a big jump in purchases of big-ticket products such as cars, reflecting the fact that auto dealers brought back popular sales incentives.

The 0.6 percent rise in consumer spending followed an outright decline of 0.1 percent in August, which had followed a 1.2 percent July increase. Consumer spending is closely watched since it accounts for two-thirds of total economic activity.

Income growth was a far more moderate 0.2 percent in September following a 0.3 percent rise in August, which had been the biggest income increase since a 0.5 percent rise in May.

In other economic news, the Commerce Department reported that construction spending was essentially flat in September after big gains of 0.9 percent in August and July.

The sharp slowdown reflected a 0.2 percent drop in residential construction, the first decline in this category since February 2003. Residential building activity, which still totaled $560 billion at an annual rate, has been red-hot in recent years, reflecting the lowest mortgages rates in four decades.

Nonresidential building activity posted a 0.3 percent increase in September, coming in at an annual rate of $453.9 billion, reflecting strength in hotel and motel construction, schools and churches.

Private construction was down 0.1 percent in September, the first decline since January, to an annual rate of $777.5 billion, but this weakness was offset by a 0.3 percent rise in government construction activity which rose to $236.4 billion. The strength in government activity reflected a 3 percent jump in office construction, which helped offset a 1.5 percent drop in highway construction.

In a third report, a key index of factory health showed manufacturing activity expanded in October for a 17th straight month although the figure for last month was lower than had been expected.

The Institute of Supply Management said that its closely watched gauge of manufacturing activity posted a reading of 56.8 in October, down from 58.5 in September. A reading above 50 indicates that the manufacturing sector of the economy is continuing to expand.

The government reported on Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 3.7 percent in the July-September quarter, up from a 3.3 percent rate of GDP growth in the April-June quarter.

That rebound reflected a bounce in consumer spending to an annual rate of 4.6 percent, far ahead of the anemic 1.6 percent rate in the second quarter.

While an improvement over the second quarter, the 3.7 percent GDP growth in the third quarter was still below economists’ predictions that the economy was expanding at a 4.3 percent annual rate in the summer.

The economy has been a major debating point in the presidential election with President Bush contending that his large tax cuts have helped to jump-start growth following the 2001 recession. Challenger John Kerry contends the tax cuts went primarily to the wealthy and helped to produce record budget deficits.

The Commerce Department reported that purchases of durable goods, the category that includes autos, rose by 1.6 percent in September after having fallen by 2 percent in August.

Americans’ after-tax incomes rose by a tiny 0.1 percent in September following a 0.2 percent advance in August.

With spending rising three times as fast as after-tax incomes, Americans’ savings rate dropped to 0.2 percent in September, down from 0.7 percent in September. It was the lowest level for the savings rate since it dropped to an all-time low of minus 0.2 percent in October 2001.

Economists are concerned that if incomes do not rebound, Americans will be forced to cut back on spending at some point, given that the savings rate is at such a low level.

Income growth has lagged in part because job growth has been disappointing in recent months. While the unemployment rate stayed at 5.4 percent in September, the economy created just 96,000 jobs during the month, far below the 150,000 jobs analysts had been expecting.

Businesses have grown cautious about hiring new workers out of concern that the big jump in energy prices will slow economic activity in the months ahead.

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