Consumer spending inched up by an unexpectedly small 0.2 percent last month and construction spending tumbled, according to reports on Friday that heightened concerns on the health of the economy.
While personal spending rose slightly, the Commerce Department said consumer prices climbed an even greater 0.3 percent, leaving inflation-adjusted spending flat in October after a slim 0.1 percent rise in September.
You're looking at a very slow profile for the fourth quarter, particularly with regards to consumer spending, said Cary Leahey, senior managing director at Decision Economics in New York. This is another reason for the Fed to lower interest rates.
A separate Commerce Department report showed construction spending fell 0.8 percent as home building continued to wither. The drop was the biggest since July and it took construction spending down to a $1.158 trillion annual rate, the lowest in two years.
Rising delinquencies in the risky subprime mortgage market will likely prolong the deterioration.
A Federal Reserve Bank of New York report on Friday showed that 12 percent of U.S. subprime adjustable-rate mortgages were delinquent by at least 60 days and 7 percent were in foreclosure.
U.S. stocks were up in early afternoon and prices for U.S. government securities fell as the gloomy data helped reinforce expectations the Federal Reserve would lower borrowing costs at an upcoming meeting on December 11.
That sentiment was reinforced by Philadelphia Federal Reserve Bank President Charles Plosser who said there was uncertainty from the renewed turmoil in financial markets.
We will watch and see and react as appropriate, he said.
A report that the U.S. Treasury will soon unveil a plan to help stem the subprime mortgage crisis also buoyed sentiment on Wall Street.
Plosser's comments added to the warnings of Fed Chairman Ben Bernanke late on Thursday that credit markets strains could slow the economy and that consumer spending could falter.
I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some head winds for the consumer in the months ahead, Bernanke said.
While the Commerce Department said consumer prices as measured by the personal consumption expenditures price index rose 0.3 percent, core prices that strip out volatile food and energy costs gained a more modest 0.2 percent.
Over the past year, this core price reading rose 1.9 percent, the same as in the 12 months through September and in a range Fed officials deem acceptable. This could help some officials set aside lingering inflation concerns and support a rate cut.
Personal income grew by just 0.2 percent in October, half the amount economists were expecting. Disposable income went up a scant 0.1 percent and when adjusted for inflation disposable income fell 0.1 percent.
We are fearing that the weak October report might indicate a turning point and that income gains will continue to lose momentum in upcoming months, wrote Harm Bandholz, an economist for UniCredit Markets and Investment Banking in New York in a note to clients.
So far the labor market has been holding fairly steady, keeping money in the pockets of consumers, but as cracks emerge economists and policy-makers now expect weaker spending going forward.
HOUSING ACTIVITY GRIM
The Commerce Department said spending on private home building fell 2 percent in October to a $503.7 billion annual rate, the lowest in four years. It was the 20th straight monthly decline since a peak in February 2006.
The unsustainable supply of new homes on the market continues to hover over the head of the construction community like the sword of Damocles. Until that supply is burned off construction activity will remain severely diminished, said Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York.
But helping to offset some of the housing sector woes, state and federal construction spending rose for the eighth straight month, reaching a record rate of $295.1 billion.
A separate report on business activity in the U.S. Midwest offered a spot of bright news.
The National Association of Purchasing Management-Chicago business barometer rose to 52.9 from 49.7 in October, moving back into territory that indicates expansion after falling below the 50 break-even level in October.
Pretty strong report right across the board. Part of this is the rebound in auto production, said Mark Vitner, economist at Wachovia in Charlotte, North Carolina.