Spending Growth Slowed in September
Thursday November 1, 5:48 pm ET
By Martin Crutsinger, AP Economics Writer
Consumers Slow Spending Growth While Key Manufacturing Gauge Slips for Fourth Straight Month


WASHINGTON (AP) -- The growth in consumer spending slowed to a crawl in September as shoppers, worried about a deepening housing downturn, stayed away from the malls.

A different gauge of manufacturing activity slipped close to recession levels last month.

The latest economic data is likely signaling that a sharp slowdown is under way over the next two quarters as the housing slump, this summer's severe credit crunch and now rising energy prices take a toll on economic growth, analysts said.

The Commerce Department reported Thursday that consumer spending rose by 0.3 percent in September, the smallest rise in three months and lower than the 0.4 percent increase analysts expected. The 0.4 percent gain in incomes was in line with expectations.

In another report, the Institute for Supply Management, an Arizona-based trade group, said its manufacturing index dipped to 50.9 in October. That was the weakest level since March and the fourth consecutive month that manufacturing has slowed.

The September reading had been 52 and analysts had expected a slightly stronger 51.8 for October. Any reading lower than 50 indicates that the manufacturing portion of the economy is in recession.

The worse-than-expected economic news sent stocks sharply lower. Investors grappled with evidence that the economy is slowing. At the same time, the Federal Reserve indicated that this week's interest rate cut, the second in two months, may be all the relief it plans to deliver, given a rising inflation threat from rapidly rising oil prices.

The Dow Jones industrial average fell 362.14 points to close at 13,567.87.

The government reported on Wednesday that the economy surged ahead at an annual rate of 3.9 percent in the July-September quarter. But economists believe all the current problems will slash that growth rate to 2 percent or less in the current quarter and the first three months of 2008.

That is expected to be the period of greatest danger when the current expansion, which celebrates its sixth birthday this month, could slip into a recession. The worry is that consumer spending, which accounts for two-thirds of total economic activity, will retreat further as worried consumers cut back on purchases.

"Consumers are becoming increasingly cautious because of the recession in housing, rising gasoline prices and a somewhat softer job market," said Mark Zandi, chief economist at Moody's Economy.com.

A key problem for spending is falling home prices in many parts of the country, Zandi said. That means consumers can no longer pull equity out of their homes by refinancing their mortgages. During the five-year housing boom, equity withdrawal was a major factor supporting higher spending levels.

"The inability of consumers to pull cash out of their homes will weigh on consumer spending measurably over the course of the coming year," he predicted.

The news about inflation from the consumer spending report was generally good. Prices paid by consumers on the Fed's preferred inflation gauge rose 0.2 percent in September, excluding food and energy. This measure is up 1.8 percent over the past 12 months, the fourth straight month that it has been within the Fed's comfort zone of 1 percent to 2 percent increases in core inflation.

The Labor Department reported that the number of newly laid off workers filing claims for unemployment benefits dropped by 6,000 last week to 327,000. But the four-week average for claims climbed by 1,750 to 327,000, a six-month high. Analysts are looking for unemployment to rise in coming months as employers increase layoffs and scale back hiring plans in the face of the slowing economy.

Chrysler LLC announced on Thursday that it plans to cut up to 12,000 jobs by the end of next year as part of an effort to reduce costs in the face of slowing demand for some of its vehicles.

While analysts believe the unemployment rate could climb as high as 5 percent, they are looking for the October rate to remain unchanged at 4.7 percent. That figure will be released by the government on Friday.

The 0.3 percent September rise in spending followed gains of 0.5 percent in August and 0.4 percent in July.

It was the slowest rise since spending edged up by just 0.2 percent in June. If inflation is removed, the rise in spending was an even weaker 0.1 percent in September.

The 0.4 percent rise in personal income was matched by a similar 0.4 percent rise in after-tax incomes. The savings rate rose to 0.9 percent in September, the best showing since March, and a reflection, analysts said, that households are trying to save more now that they cannot refinance to get their hands on extra cash.