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Consumer spending falls in US

Washington, October 31, 2009

US consumers cut spending last month and turned gloomier this month, underscoring the fragility of the economy's recovery even as signs emerged that manufacturing may be picking up.

The Commerce Department said yesterday consumer spending fell 0.5 per cent last month, the largest drop since December, after a 1.4 per cent increase in August.

The decline, which was in line with market expectations, followed the end of a government incentive programme to boost car sales, according to a report in our sister newspaper Gulf Daily News.

A separate report showed factory activity in the nation's Midwest expanding for the first time in more than a year, but employment conditions deteriorated.

A dismal job market appeared to weigh on consumers, with the Reuters/University of Michigan final index of sentiment for October slipping to 70.6 from 73.5 last month.

'The irony is consumers are still in a funk even though monthly job losses are shrinking. The economy is in a recovery mode, but it will be a soggy recovery, unless the consumer starts to feel better and spend more,' said Decision Economics economist Cary Leahey.

US Federal Reserve policymakers, who meet on Tuesday and Wednesday, are expected to keep their support for the economy in place for some time given labour market slack and muted inflation pressures. The Fed cut overnight interest rates close to zero in December and has held them there ever since.

Government data showed the economy grew at a 3.5 per cent annual rate in the third quarter, probably ending a recession that began in December 2007.

Much of the expansion was driven by a sharp turnaround in consumer spending, which normally accounts for more than two-thirds of US economic activity.

Spending in the third quarter was bolstered by the popular 'cash for clunkers' programme, which provided discounts on some new motor vehicle purchases. But that programme ended in August, and consumers retrenched last month.

With the labour market still too weak to support domestic demand, there are worries the economy's incipient recovery from the worst recession since the 1930s could wobble once the government support fades.

Analysts said the drop in consumer spending last month should not be interpreted as a sign it will turn negative in this quarter, normally a crucial one for retailers given the end-of-year holiday selling season.

'Consumer spending will probably continue to grow, but at a more subdued pace. After the 3.4 per cent real spending growth in the third quarter, we expect consumption growth of 1 per cent or less in the fourth quarter,' IHS Global Insight chief US economist Nigel Gault said.




Tags: economy | US | Consumer spending |

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