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U.S. consumers retreat further into their wallets

November 01, 2008|The Associated Press

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

The Commerce Department said Friday that personal spending fell by 0.3% that month, the biggest drop since June 2004. That followed flat readings in July and August, contributing to the worst quarterly performance in 28 years.

Incomes showed a 0.2% rise in September, just half the August increase, a slowdown that partly reflected the adverse effects of Hurricane Ike along the Gulf Coast.

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% in the third quarter, the strongest signal yet that the nation 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% in fourth-quarter GDP.

In a separate report, the Labor Department said Friday that wages and benefits paid to U.S. workers rose a moderate 0.7% in the third quarter, matching the gains in the previous two quarters.

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

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