Spending drops 0.3% in September, most in four years

WASHINGTON -- Consumer spending dropped in September by the largest amount in four years while incomes suffered because of Hurricane Ike.

The Commerce Department says personal spending fell 0.3% last month, biggest decline since June 2004. That followed flat readings in both July and August, contributing to the worst quarterly performance in 28 years.

Incomes showed a 0.2% rise in September, just half August's increase, a slowdown that partly reflected the adverse effects of Hurricane Ike along the Gulf Coast. The storm cut into rental payments and earnings from businesses affected by the storm.

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 economic activity.

The government reported Thursday that gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.3% in the third quarter, strongest signal yet that the country was falling into a recession even before the severity of the financial crisis was fully felt.

With reports showing the crisis has driven consumer confidence to a record low, economists believe consumer spending will remain weak in the current quarter, sending GDP down by an even bigger amount. Some analysts are forecasting a drop of 1% to 2% in fourth quarter GDP.

Two consecutive quarterly declines in GDP would meet one thumbnail definition of a recession, although the National Bureau of Economic Research uses many different measurements to pinpoint the beginning and ending dates of recessions. The bureau has yet to say the country is in a recession.

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

While core inflation is still rising at levels above the Federal Reserve's comfort zone of 1% to 2%, the central bank is expected to focus on fighting to keep the country out of a severe recession, believing pressures from inflation will be waning as energy prices and other costs retreat, reflecting the weak economy.

The Fed cut a key interest rate by a half-point Wednesday to 1%, tying the lowest level in the past half-century. Analysts said if the economy remains weak, the Fed could cut rates again at their last meeting of the year, Dec. 16.

In a second report Friday, the Labor Department said employment costs for civilian workers increased by a seasonally-adjusted 0.7% for the June-September period, the same as in the previous two quarters.

That level of growth is the lowest since wages and benefits rose 0.6% in the first quarter 2006, and provides evidence that the weak labor market is limiting the ability of employees to demand raises and more generous benefits.

Breaking the overall figure down, the department said wages and salaries rose 0.7% in the third quarter, the same as the previous period, while benefits increased 0.6%, also matching the previous quarter.

The department's report will likely reassure Federal Reserve policymakers that pay and benefits aren't rising sharply enough to create inflation concerns.