Business

Anxious consumers keep grip on wallets

WASHINGTON — Reluctance on the part of consumers to shop for cars and other big-ticket items led U.S. consumer spending to its biggest drop since June 2004, the Commerce Department reported Friday.

Consumer spending fell 0.3 percent in September after remaining flat in August.

On a year-on-year basis, spending was down 0.4 percent, the first such drop since the recession of 1991. Consumer spending has not grown since June.

September's weak performance is a clear sign that a recession is under way.

The weakness of consumers was not a surprise. The government estimated Thursday that the U.S. economy contracted at a 0.3 percent annualized rate in the third quarter. And consumer confidence has fallen to the lowest level in decades, given the decline in jobs, the stock market and the credit squeeze.

"The U.S. consumer is in major trouble, with wage and salary income growth evaporating, credit extremely tight or unavailable, home prices continuing to decline, household balance sheets stressed, and food and energy costs consuming a large share of budgets. A consumer-led recession is upon us, and it promises to be a serious one," Josh Shapiro, chief economist at MFR Inc., told clients.

The Federal Reserve has already reacted to the weakness, slashing its target interest rate to 1 percent earlier this week.

Inflation-adjusted spending on durable goods fell 0.2 percent in September. This was the second straight monthly decline. Real spending on nondurable goods was up 0.2 percent in September, while spending on services rose 0.1 percent.

Also last month, personal incomes increased 0.2 percent after rising 0.4 percent in August.

Disposable incomes adjusted for inflation rose 0.1 percent after a sharp 1.0 percent decline in the previous month.

Adjusted for inflation, consumer spending fell 0.4 percent in September. Shapiro said that figuring out how long the recession will last depends on how fast households move to rebuild savings out of current income. A complete collapse in spending would be more disruptive than a measured long-term move.

"There seems no escaping the fact that the U.S. consumer will not be the world's engine of growth for many years to come," Shapiro said.

With income rising faster than spending, the personal savings rate rose to 1.3 percent in September, up from 0.8 percent in August.

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