U.S. Consumers Hang Onto Wallets in Face of Financial Storm

Oct. 31, 2008
The decline in spending was the steepest since June 2004.

U.S. consumers slashed spending by a sharp 0.3% in September in the face of an intense financial market storm that is tipping the economy into recession, government data showed on Oct. 31. A Commerce Department report said the drop in spending -- which accounts for two-thirds of U.S. economic activity -- came even as incomes rose 0.2%.

The decline in spending was the steepest since June 2004, according to officials, and sharper than the average 0.2% decline expected by private economists. Adjusted for inflation, the drop was a steeper 0.4%.

The monthly report was no surprise, since it came a day after the government report on July-September gross domestic product (GDP) showing an annualized 3.1% decline in consumer spending in the quarter, the biggest drop since 1980.

The sharp drop in consumer spending drove third-quarter GDP into a 0.2% contraction, confirming predictions that the world's biggest economy is heading into a deeper recession.

An inflation index linked to the report, the personal consumption expenditure index, increased 0.1% and the core PCE index, excluding food and energy, rose 0.2%.

The savings rate rose to 1.3% of disposable income in September as consumers slammed their wallets shut in the face of falling home prices, rising unemployment and growing financial turmoil.

Copyright Agence France-Presse, 2008

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