Consumer Spending Reported Down 0.2% in October

The Commerce Department said Friday that consumer spending dropped 0.2 percent in October. It was the weakest figure since May, and it compared with a 0.8 percent spending increase in September. Income had risen 0.4 percent in September.

Work interruptions caused by the storm reduced wages and salaries in October by about $18 billion at an annual rate, the government said. The storm affected 24 states, with the most severe damage in New York and New Jersey.

Consumers may also be scaling back on spending because of fears about the automatic tax increases and spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal by then.

“The upshot is that although both incomes and spending will probably bounce back in November, the underlying trend is weak,” said Paul Dales, senior United States economist at Capital Economics.

The spending figures suggested that the economy was growing more slowly in the October-December quarter than it did in the July-September quarter. Consumer spending drives nearly 70 percent of economic activity.

Mr. Dales predicted that domestic economic growth would slip from the 2.7 percent annual rate in the July-September quarter to 1 percent in the October-December period. That is too low to cut the unemployment rate, now at 7.9 percent.

Income and spending gains would have been meager even after discounting the effects of the storm. Income would have risen 0.1 percent. Spending would have been essentially flat, Mr. Dales said.

After-tax income adjusted for inflation fell 0.1 percent in October. And spending, when adjusted for inflation, dropped 0.3 percent — the biggest such decline in three years. The saving rate edged up slightly to 3.4 percent of after-tax income in October, compared with 3.3 percent in September.

Many economists say growth will rebound once rebuilding begins in the Northeast. And if President Obama and Congress can reach a budget deal, some economists, including the Federal Reserve chairman, Ben S. Bernanke, are predicting a strong year for the economy.

Article source: http://www.nytimes.com/2012/12/01/business/economy/consumers-cut-spending-in-october.html?partner=rss&emc=rss