Consumer Spending Spikes

Consumers, who substantially slowed down their spending in late summer, roared back to life in September, boosting their purchases by 0.6 percent. The gain in spending reported Monday by the government far outpaced the increase in incomes.

The Commerce Department attributed the spending surge to a big jump in purchases of big-ticket products such as cars, reflecting the fact that auto dealers brought back popular sales incentives.

"There was a broad-based improvement in consumer spending in September," Mark Zandi, chief economist of Economy.com, told CBS Radio News. "Consumers paused a bit during the summer and seemed to come out more strongly in September."

One reason, Zandi said, was the hurricanes in Florida.

"It got people into building material and supply stores getting those things they needed to prepare for the hurricanes and to clean up afterwards," he said.

The 0.6 percent rise in consumer spending followed an outright decline of 0.1 percent in August, which had followed a 1.2 percent July increase. Consumer spending is closely watched since it accounts for two-thirds of total economic activity.

Income growth was a far more moderate 0.2 percent in September following a 0.3 percent rise in August, which had been the biggest income increase since a 0.5 percent rise in May.

"It doesn't augur well going forward. Incomes have not been keeping pace with spending, saving rates are very low, in fact, they're closing in on zero, which is unprecedented," said Zandi.

Americans' after-tax incomes rose by a tiny 0.1 percent in September following a 0.2 percent advance in August.

With spending rising three times as fast as after-tax incomes, Americans' savings rate dropped to 0.2 percent in September, down from 0.7 percent in September. It was the lowest level for the savings rate since it dropped to an all-time low of minus 0.2 percent in October 2001.

Economists are concerned that if incomes do not rebound, Americans will be forced to cut back on spending at some point, given that the savings rate is at such a low level.

"We need to see better job growth, wage growth to ensure that consumers continue to spend strongly like they did in the month of September," said Zandi.

Last week, the Conference Board reported that consumer confidence was down for the third consecutive month, falling more than expected as people displayed worries over the job market, business conditions and their household incomes in coming months.

Income growth has lagged in part because job growth has been disappointing in recent months. While the unemployment rate stayed at 5.4 percent in September, the economy created just 96,000 jobs during the month, far below the 150,000 jobs analysts had been expecting.

Businesses have grown cautious about hiring new workers out of concern that the big jump in energy prices will slow economic activity in the months ahead.

The government reported on Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 3.7 percent in the July-September quarter, up from a 3.3 percent rate of GDP growth in the April-June quarter.

That rebound reflected a bounce in consumer spending to an annual rate of 4.6 percent, far ahead of the anemic 1.6 percent rate in the second quarter.

While an improvement over the second quarter, the 3.7 percent GDP growth in the third quarter was still below economists' predictions that the economy was expanding at a 4.3 percent annual rate in the summer.

The economy has been a major debating point in the presidential election with President Bush contending that his large tax cuts have helped to jump-start growth following the 2001 recession. Challenger John Kerry contends the tax cuts went primarily to the wealthy and helped to produce record budget deficits.

The Commerce Department reported that purchases of durable goods, the category that includes autos, rose by 1.6 percent in September after having fallen by 2 percent in August.

Separately, the Institute for Supply Management reported Monday that activity in the nation's manufacturing sector grew in October for the 17th straight month, but at a slower pace than the previous month,.

The group's index for manufacturing activity came in at 56.8, below the level of 58.5 that economists were expecting. The index had been 58.5 in September.

In its report, the ISM also said there is "significant upward pressure" on prices, and that in particular higher prices for energy and commodities were "major concerns" for buyers of manufacturing supplies.