US consumer spending fell in October for the first time in five months and income growth stalled, leading some economists to cut already weak estimates of fourth-quarter economic growth. Superstorm Sandy was partly to blame for the pullback in spending as the quarter started, but economists said the data on Friday also underscored the economy's fundamental weakness, stemming from the uncertainty over the course of fiscal policy.
The Commerce Department said consumer spending fell 0.2 percent after a 0.8 percent increase in September. Income growth was flat as wages and salaries dropped 0.2 percent, in part because of work disruptions caused by the storm, which lashed the East Coast in late October. But even stripping out the $18.2 billion annual rate hit to wages and salaries from the storm, they would have been flat.
"What this is showing is the economy, broadly, is slowing in the fourth quarter and it is concern on the part of businesses and consumers with respect to the fiscal cliff," said David Berson, chief economist at Nation-wide Insurance in Columbus, Ohio. The cliff refers to automatic government spending cuts and tax hikes early next year that could drain about $600 billion from the economy unless lawmakers and the Obama administration agree on a less painful plan to reduce budget deficits. Fears an impasse could send the economy into a swoon undercut business spending in the third quarter. So far there is little sign of progress in Washington budget talks, which the top Republican in Congress on Friday said were at a "stalemate."
Inflation-adjusted consumer spending fell 0.3 percent in October, the first decline since June, after rising 0.4 percent the prior month. It was the largest drop in real spending since September 2009 and implied growth in consumer spending this quarter would struggle to exceed the third-quarter's 1.4 percent annual pace, which was the slowest in more than a year. The data prompted economists to cut fourth-quarter GDP growth estimates, some quite sharply. Estimates now centre between a 1.0 percent and 1.8 percent annual pace. The economy expanded at a 2.7 percent rate in the third quarter.
Consumer spending is expected to bounce back by December as households replace goods damaged by the storm and income picks up as workers return to work. However, the magnitude could hinge on the outcome of the budget talks. The income at the disposal of households after inflation and taxes dipped 0.1 percent last month after being flat in September. Despite weak income growth, the saving rate - the percentage of disposable income households are socking away - rose to 3.4 percent from 3.3 percent the prior month.
Inflation was largely contained, helped by a 29 cent drop in gasoline prices. A price index for consumer spending nudged up 0.1 percent, taking its increase over the past 12 months up to 1.7 percent from 1.6 percent in September. So-called core prices, which strip out food and energy costs, also edged up 0.1 percent, with the year-on-year gain holding steady at 1.6 percent. Economists said weak growth and benign inflation could compel the Federal Reserve to keep on an ultra easy monetary policy path.
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