US consumers cut spending

By Shobhana Chandra  |   2008-11-1  |     NEWSPAPER EDITION

SPENDING by American consumers dropped more than forecast in September, capping the weakest quarter in three decades and indicating the economic slump is deepening.

The 0.3-percent decrease in purchases was the biggest in four years and followed no change in August and July, the Commerce Department said yesterday in Washington.

The report also showed that the Federal Reserve's preferred measure of inflation cooled last month, Bloomberg News reported.

"Consumers have thrown in the towel," said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. "They have no choice but to cut back on spending in a very big way. This is going to be a fairly deep, long recession."

Job losses, increases in food and fuel costs and falling property values brought an end to the longest expansion in spending on record and has made the economy the most important issue in next week's presidential election. The collapse in lending and sentiment this month indicated Americans would keep retrenching.

Waning inflation concerns mean the Fed had "more room to maneuver" with interest rates, Behravesh said. San Francisco Fed President Janet Yellen said Thursday that the central bank may cut the benchmark rate close to zero percent from the current 1 percent level should the economy remain weak.

Employment Costs

A Labor Department report yesterday showed that employment costs rose 0.7 percent in July to September, the same pace as the previous two quarters. That's a sign that rising unemployment is stifling gains in wages and benefits.

Treasuries added to earlier gains after the report and stock-index futures dropped. Futures on the Standard & Poor's 500 Stock Index declined 1.2 percent to 949.60 at 8:50am yesterday in New York. Benchmark 10-year note yields fell to 3.85 percent, from 3.96 percent late Thursday.

Economists forecast spending would fall 0.2 percent.

Incomes rose 0.2 percent, after a 0.4 percent gain the prior month.