- The Washington Times - Saturday, October 31, 2009

Consumer spending took a discouraging turn for the worse in September, casting doubt on the strength of the economic recovery, raising fears of a dismal holiday shopping season and sending the stock market sharply lower.

Personal consumption fell 0.5 percent in September, the biggest drop since December 2008, the Commerce Department reported Friday. At the same time, income from wages and salaries fell 0.2 percent and remains below December 2006 levels, reflecting the heavy toll that the longest, deepest recession in seven decades has taken on household finances.

In another bad omen for retailers, the Reuters/University of Michigan index of consumer sentiment declined from 73.5 in September to 70.6 in October. Friday’s report found that rising unemployment and gasoline prices outweighed rising stock prices in the minds of American consumers.

All that negative news sent the Dow Jones Industrial Average tanking 249.82 points (2.5 percent) to 9,712.73, wiping out Thursday’s 200-point gain and leaving the blue chip index flat for the month of October.

The broad-based Standard & Poor’s 500-Stock Index declined 29.92 points (2.8 percent) to 1,036.19, while the tech-heavy Nasdaq Composite Index fell 52.44 points (2.8 percent) to 2,045.11.

Economists are concerned that the fledgling recovery could falter as households continue to confront rising unemployment, stagnant wages, large debt loads, tight credit and housing values that are about 30 percent below their 2006 peak.

The National Retail Federation is expecting consumers to spend an average of $683 on holiday-related shopping this season, a 3.2 percent drop from $705 last year.

Consumer spending, which accounts for 70 percent of economic activity, increased 3.4 percent during the July-September period but declined noticeably at the end of the quarter.

Spending on durable goods - products, such as autos, that are expected to last three years or longer - plunged 7 percent in September. Spending on nondurable goods, however, increased 0.7 percent, and spending on services was up 0.2 percent.

Economists agree that the federal government’s “cash for clunkers” program, which began in July and ended in August, produced volatile monthly spending patterns during the third quarter.

“If we look a little deeper, we can see that there has been an underlying improvement in spending,” said Nigel Gault, chief U.S. economist for the research firm IHS Global Insight. “From June to September - before and after the clunkers program - spending grew at an annual rate of 2.6 percent,” he noted. “The question is whether consumers can keep this up.

“On this front, the news in today’s report was not encouraging,” he said, pointing to flat personal income and declining wage and salary income. “Only an increase in government transfer payments prevented an overall decline in incomes,” he said.

Employee compensation over the past year has been stagnant. In a separate report, the Labor Department revealed Friday that wages and benefits were just 1.5 percent higher in the third quarter than they were a year ago. It was the smallest annual increase since recordkeeping began in 1982.

“Slow increases in wages and benefits are a mixed bag, economically. Consumer spending stays in check, but firms contain costs, aiding profitability,” said Sara Kline, an economic analyst at Moody’s Economy.com.

“The outlook for compensation growth remains weak,” she said.

Facing bleak income prospects, consumers may decide to keep a firm grip on their wallets during the coming holiday season.

At least consumers do not have to contend with high inflation or rising interest rates. The Federal Reserve’s preferred inflation gauge, which excludes food and energy, increased 0.1 percent last month and was up just 1.3 percent over the past year. That was below the Fed’s comfort zone, between 1.5 percent and 2 percent. The Reuters/University of Michigan consumer-sentiment survey also revealed that long-term inflation expectations remain tame.

“Anchored long-term inflation expectations will allow the Federal Reserve to keep interest rates unchanged for the foreseeable future,” observed Ryan Sweet, an economist at Moody’s Economy.com.

Since December 2008, the Fed has maintained its target short-term interest rate between 0 and 0.25 percent, a historic low. Many analysts believe that the Fed’s eye-popping expansion of the money supply has been the most important factor in battling the recession, which began in December 2007, and in halting the economic plunge that commenced in September 2008.

Michelle Nealy contributed to this article.

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