Spending drop raises concerns about growth

on October 30 2009 9:32 AM

U.S. consumer spending fell in September after four months of gains as a government program to boost auto purchases ended, adding to fears that economic growth could stumble without government support.

The Commerce Department said on Friday consumer spending fell 0.5 percent, the largest decline since December, after a 1.4 percent increase in August. The decline was in line with market expectations.

A separate report from the Labor Department showed employment costs in the United States rose 0.4 percent in the third quarter, matching the previous period's increase and indicating marginal gains in income.

U.S. stock index futures trimmed losses after the economic data, while U.S. government debt prices rose.

It sets up a very weak fourth quarter for consumption. It might be around flat to up 1 percent annualized in the fourth quarter, said Ian Morris, chief economist at HSBC Securities in New York.

But if inventories add and you get some rise in business investment, you could get a much more decent fourth-quarter (GDP gain) of around 3 percent, he said.

Government data on Thursday showed the economy grew at a 3.5 percent annual rate in the third quarter, probably ending a recession that began in December 2007.

With the labor market still too weak to support domestic demand, there are worries the economy's incipient recovery could stumble once the government support fades.

Consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, in August was bolstered by the popular cash for clunkers program that gave discounts on some new motor vehicle purchases.

The program, which ended in August, contributed to a jump in consumer spending in the third quarter and helped to pull the economy out of its worst recession since the 1930s.

Spending adjusted for inflation fell 0.6 percent in September, also the largest decline since December, after rising 1 percent the prior month, the Commerce Department said.

Personal income was flat last month after rising 0.1 percent in August. That was also in line with market expectations. Real disposable income fell 0.1 percent in September.

The issue of poor labor income remains quite front and center, said Pierre Ellis, senior economist at Decision Economics in New York. The ability to finance consumer spending growth will come down to improvement in the labor market.

Despite the fall in income, Americans saved more money last month. Savings increased to an annual rate of $355.6 billion, lifting the saving rate to 3.3 percent from 2.8 percent in August.

Commerce Department data also showed the personal spending price index excluding food and energy, a key inflation gauge monitored by the U.S. Federal Reserve, was up 1.3 percent from a year ago in September, matching the August increase.

Federal Reserve policymakers, who have cut interest rates to almost zero to aid growth and have said they expect to keep rates exceptionally low for an extended period.

In the Labor Department report, the 1.5 percent increase in compensation in the third quarter compared to the same period a year-ago, was the smallest on records dating back to 1982.

Increases in wages and salaries from year-ago levels, at 1.5 percent, and benefits, at 1.6 percent, were the lowest on record.

In the third quarter, compensation at state and local governments - many of which are facing yawning budget gaps -- was unchanged as wages and salaries fell 0.1 percent.

That was the first time since the index began tracking state and local governments in 2001 that wages shrank, the department said.

(Reporting by Lucia Mutikani and Lisa Lambert; Editing by Neil Stempleman)

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