Wednesday, November 26, 2008

Consumer spending drops 1%

Consumer spending fell dramatically in October, according to a government report released Wednesday, in another woeful sign that the economy will continue to contract.

The Commerce Department said spending by individuals fell by 1% last month, after declining 0.3% in September. It was the biggest decline since September 2001 and worse than the 0.7% drop economists surveyed by had forecast.

Falling consumer prices contributed heavily to the decline in overall spending. The so-called core PCE deflator rose by just 2% in the past 12 months, down from 2.2% by that measure in September.

This key reading, which measures prices paid by consumers for goods and services other than food and energy, is now in the 1% to 2% inflation window the Federal Reserve is generally believed to want, and it echoes a Labor Department report released last week that showed consumer prices fell by the highest amount since 1947.

But the report showed spending still fell by 0.5% when prices were not taken into account.

That's an ominous sign ahead of the holiday shopping season. It's particularly worrisome for the economy since consumer spending accounts for about two-thirds of the nation's gross domestic product.

Personal income, however, rose 0.3% in October, following a 0.2% rise in the previous month. Economists had expected a 0.1% rise.

The rise in personal income far outpaced the change in prices, leading to a 1% rise in real income in the period, the most since September 2005.

Because income gains outpaced spending, consumers posted a savings rate of 2.4% in the month compared with just 1% in September. That means the average household saved $2.40 on every $100 of after-tax income.

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