Consumers, Battered By Housing Downturn, Slow Spending

WASHINGTON (AP) _ Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed spending growth in September to the weakest performance in three months. <br/><br/>The Commerce Department

Thursday, November 1st 2007, 8:13 am

By: News On 6

WASHINGTON (AP) _ Consumers, battered by a steep downturn in housing and a severe credit crunch, slowed spending growth in September to the weakest performance in three months.

The Commerce Department reported Thursday that consumer spending rose by 0.3 % in September, slightly lower than the 0.4 % increase that analysts had been expecting. Incomes grew by 0.4 %, matching the August gain, and in line with analysts' forecasts.

Economists are worried that consumers, the main support for the economy, may cut back on their visits to the malls in coming months as they struggle with the housing slowdown, tighter credit and now record-high oil prices.

The Federal Reserve on Wednesday cut a key interest rate for the second time in six weeks in an effort to make sure the economy does not tumble into a recession. However, the central bank also expressed concerns that surging oil prices could fan inflation pressures. Oil prices have soared to record highs in recent days.

The news about inflation from the consumer spending report was good. Prices paid by consumers on the Fed's preferred inflation gauge rose a moderate 0.2 % in September, excluding food and energy. This measure is up 1.8 % over the past 12 months, inside the Fed's comfort zone of increases in core inflation of between 1 % and 2 %.

In other economic news, the Labor Department said that the number of newly laid off workers filing claims for unemployment benefits fell by 6,000 last week to a total of 327,000. That was a bigger drop than analysts had been expecting.

Analysts are looking for the unemployment rate to rise slightly in coming months, reflecting a slowing economy. For September, economists believe the jobless rate remained at 4.7 % with businesses creating a modest 80,000 new jobs. The government will release that data on Friday.

The overall economy grew at a stronger-than-expected annual rate of 3.9 % in the July-September quarter, helped by a rebound in consumer spending, which accounts for two-thirds of total economic activity.

But analysts believe that growth will slip to less than half that level in the current quarter and the first three months of 2008 under the impact of the worst housing downturn in more than two decades, which has rattled consumer confidence.

Many economists see the next few months as the maximum danger point when the economy could slip into a full-blown recession. However, analysts still believe the chances are good that the country can avoid a downturn because they believe the Fed will help matters by cutting rates further should economic data weaken more.

The 0.3 % September rise in spending followed gains of 0.5 % in August and 0.4 % in July. It was the slowest rise since spending edged up by just 0.2 % in June.

If inflation is removed from the spending figures, the rise in spending was even weaker in September, an inflation-adjusted increase of just 0.1 %, compared to a 0.6 % surge in August.

The 0.4 % rise in personal income was matched by a similar 0.4 % rise in after-tax incomes. The savings rate rose to 0.9 % in September, the best showing since March.