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Consumer spending slips

Consumers kept a tighter grip on their wallets in September, trimming spending by 0.3 percent after a summertime shopping spree that propelled a third quarter of strong economic growth.
/ Source: The Associated Press

Consumers kept a tighter grip on their wallets in September, trimming spending by 0.3 percent after a summertime shopping spree that propelled a third quarter of strong economic growth.

The largest over-the-month decrease in spending in a year, reported Friday by the Commerce Department, came after consumer spending shot up by 1 percent in July and then another 1.1 percent in August. Consumers spent more lavishly earlier as they began to see the cash from President Bush's third round of tax cuts.

Economists had said in advance of Friday's report that the brisk pace of spending _ which helped spur a 7.2 percent annual rate of growth in the third quarter _ just couldn't be sustained. They had predicted that shoppers would rein in their finances in September, and they did just that.

Analysts had forecast a 0.1 percent decrease in spending. The 0.3 percent decline was the largest since a 0.4 percent drop in September 2002.

Americans' incomes, meanwhile, rose by 0.3 percent in September for the third month in a row. That was slightly better than the 0.2 percent increase economists were calling for. Income growth is the fuel for future spending.

The spending and income figures are not adjusted for price changes.

In another report, consumer confidence improved in October as people felt more optimistic about the outlook for the national economy. The University of Michigan’s index of consumer sentiment rose to 89.6 in October, up from a reading of 87.7 in September.

“Consumers are gaining greater confidence, and although they are still going exercise some caution in spending, they probably will give retailers their best holiday season in four years,” said Lynn Reaser, chief economist at Banc of America Capital Management.

Consumers, whose spending accounts for two-thirds of all economic activity in the United States, have been buying at a sufficient pace to keep the economic recovery from the 2001 recession moving forward.

Despite the slowdown in September, consumers helped propel economic growth as a whole in the third quarter to its strongest pace since 1984.

The economy in the July-to-September quarter grew at a red-hot 7.2 percent annual rate as consumers spent lavishly and businesses boosted investment.

Super-low short-term interest rates, the tax cuts and a refinancing wave helped to support spending and give the economy an energizing jolt in the summer.

The missing piece, however, for a sustained rebound is steady improvement in the nation’s battered labor market, which has seen millions of job evaporate over the last three years, economists say. The risk: a prolonged sluggishness, or worse, a deterioration on the jobs front could crimp consumer spending, something that would slow the rebound.

Although economists are optimistic the job situation will get better, it is something that they are keeping a close eye on.

“The bottom line: job creation determines income and income drives spending,” said Richard Yamarone, economist with Argus Research Corp. “There are a number of signs of improving labor market conditions, however, the job creation picture remains skittish.”

As the stimulus provided by the tax cuts fades, the economy is expected to slow but still grow at a solid rate of perhaps 4 percent in the final quarter of this year, economists say.

In September, consumer spending on “durable” goods — big-ticket items, such as cars and appliances, expected to last at least three years, was cut by 5.1 percent, reversing part of August’s 3.8 percent gain.

But for “nondurables” such as food and clothes, consumers boosted spending by 0.3 percent in September, after a 1.4 percent increase the previous month. Consumer spending on services, meanwhile, rose 0.4 percent in September, up from a 0.3 percent gain in August.