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.