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Growth in consumer spending slows

Consumers battered by a slumping housing market and a credit crunch slowed the growth in spending to the smallest amount in four months. In another sign of weakness, construction activity fell by a larger-than-expected amount.
/ Source: The Associated Press

Consumers battered by a slumping housing market and a credit crunch slowed the growth in spending to the smallest amount in four months. In another sign of weakness, construction activity fell by a larger-than-expected amount.

The Commerce Department reported Friday that consumer spending edged up 0.2 percent in October, the weakest showing since a similar increase in June. Individual incomes grew by just 0.2 percent last month, the poorest showing in six months.

Meanwhile, a separate Commerce report showed that construction spending fell by 0.8 percent last month, the biggest decline since July. Activity in the besieged housing industry fell for a 20th straight month while nonresidential construction weakened as well.

The weakness in consumer spending and construction raised new worries about spreading economic weakness caused by the steepest slump in housing in more than 20 years and a widening credit crisis triggered by rising mortgage defaults. Consumers are also being battered by surging prices for gasoline and other energy products.

While economists are expressing growing concerns about a possible recession, Federal Reserve Chairman Ben Bernanke signaled in a speech Thursday night that the central bank is prepared to cut interest rates further if needed to keep the country out of a full-blown downturn.

His comments followed similar remarks by Fed Vice Chairman Donald Kohn and have raised hopes that the central bank, which has cut rates at its last two meetings, will reduce them further when Fed officials meet again on Dec. 11.

Bernanke and other Fed officials have said the central bank needs to make sure that inflation pressures do not get out of hand given the recent jump in oil prices to nearly $100 per barrel.

They got good news on that front Friday. A gauge of core inflation tied to consumer spending edged up just 0.2 percent in October and is up only 1.9 percent over the past year. That increase is within the Fed’s 1 percent to 2 percent comfort range for core inflation, which excludes energy and food.

The 0.8 percent drop in construction was far bigger than the 0.2 percent dip that had been expected. Private residential construction fell by a sharp 2 percent, the 20th straight decline in this troubled sector.

Private nonresidential construction, which had been helping to cushion the housing downturn, dropped by 0.5 percent, the first decline in this category in 13 months. The only strength came in government activity, which was up 0.8 percent as spending on state and local projects hit an all-time high.

Analysts said the 0.2 percent gain in consumer spending represented a slow start to the fourth quarter with even further weakness expected as the full impact of recent declines in consumer confidence weigh on spending during the current holiday shopping season.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that he believed consumer spending would rise by just 1 to 1.5 percent in the current quarter and he said a reading below 1 percent can’t be ruled out. In the third quarter, consumer spending posted a solid 2.7 percent rate of increase.

The 0.2 percent October spending advance was slightly below the 0.3 percent increase that analysts had been expecting. Consumer spending is closely watched because it accounts for two-thirds of total economic activity.

The government reported Thursday that the overall economy, as measured by the gross domestic product, roared ahead at a 3.9 percent annual rate in the July-September quarter.

However, that pace is expected to slow dramatically in the current quarter to less than half that pace. Some analysts believe growth could weaken to less than a 1 percent annual rate, a pace that would raise serious concerns about a possible recession.

The 0.2 percent increase in spending would have been even weaker were it not that higher energy prices pushed inflation up. Excluding price changes, consumer spending did not rise at all in October after posting a meager 0.1 percent gain in September.

The 0.2 percent rise in incomes was just half what economists had been expecting. The concern is that if the economy weakens and layoffs increase, consumers won’t have the income growth needed to support spending.