Consumer spending down in October

WASHINGTON (AP) - November 26, 2008

The Commerce Department reported Wednesday that consumer spending plunged by 1 percent last month, even worse than the 0.9 percent decline that had been expected. Personal incomes were up 0.3 percent last month, slightly better than the 0.1 percent gain analysts had expected.

The big decline in spending in October underscored concerns that the economy is falling into a deep recession. Consumer spending accounts for two-thirds of total economic activity.

The government had reported Tuesday that the overall economy, as measured by the gross domestic product, was declining at an annual rate of 0.5 percent in the July-September quarter. With October's big drop in spending, the view is that the GDP decline for this quarter will be much steeper, with some analysts projecting the economy will contract at an annual rate of 4 percent this quarter.

Many economists believe the current recession will last through the middle of next year and will be the most severe downturn since the 1981-82 slump.

Part of the fall in spending reflected declines in gasoline and other energy prices, which had been soaring earlier in the year. Adjusting for price changes, spending fell by 0.5 percent and it was the fifth consecutive decline, the longest stretch of spending declines since 1990-91, when the country was in a recession.

Consumers are being battered at the moment by rising unemployment, falling home prices and the worst financial crisis since the 1930s. The government has assembled rescue efforts totaling close to $7 trillion including $800 billion in new programs announced Tuesday to boost the availabiltiy of home mortgages and various other types of consumer loans from credit cards to auto and student loans.

The weakening economy and the big plunge in energy costs have put a lid on inflation. A price gauge tied to consumer spending dropped by 0.6 percent in October and excluding energy and food costs, this gauge showed a flat reading for the month, the best performance on inflation since core consumer prices were also flat in December 2001, when the country was just starting to pull out of the last recession.

For the past 12 months, core inflation is rising at a moderate annual rate of 2.1 percent. The moderation in inflation is expected to give the Federal Reserve room to cut interest rates further when policymakers meet in December as the central bank devotes more efforts to keeping the country from falling into a prolonged recession.

Copyright © 2022 WPVI-TV. All Rights Reserved.