Personal Income Up 0.4% in October : 0.9% Consumer Spending Drop Steepest in 25 Years

American consumers, saddled with a record high debt burden, cut purchases 0.9% last month--the sharpest drop in 25 years, the Commerce Department reported Thursday. Much of the decline was attributable to lower sales of new cars following two months of large increases.

While spending was plummeting, Americans enjoyed a 0.4% rise in income during October, the largest increase since April.

However, income growth is still well below the pace set last year, primarily because of a slowdown in employment gains.

Analysts said the combination of weak income growth, a low savings rate and high consumer debt burdens should dampen consumer spending in coming months.

Since consumer spending makes up almost two-thirds of the gross national product, weakness in this area is likely to hold back overall economic growth for the rest of this year and much of 1986, many analysts said.

Limit on Expansion

“With the savings rate as low as it is and with debt as high as it is, consumers will not be able to expand their purchases faster than income growth,” said Sandra Shaber, director of consumer economics at Chase Econometrics, a forecasting firm.

She predicted that consumer spending would be flat in the current quarter as modest growth in department store and other retail outlets fails to offset big declines in auto purchases.

While the Administration is predicting that economic growth in the fourth quarter will top 5%, Shaber said the country would be lucky to realize 3% growth. The economy expanded at a 4.3% pace from July through September, the fastest rate in more than a year.

Shaber predicted that the weak growth would continue next year, with consumer spending rising at a modest 3% rate, substantially below the 5% growth rate turned in during the first nine months of this year.

“We won’t have a collapse next year but consumer spending is not going to look like the last couple of years,” she said.

Martin Mauro, senior economist at the investment firm of Merrill Lynch, said employment growth will be the key to determining how much consumer spending rises next year.

Moderate Increase

He said drops in interest rates and some improvement in the country’s disastrous trading performance should help boost employment and provide for economic growth of around 3.3% next year. This would mark a moderate increase from the weak 2% rate many analysts are forecasting for this year.

The October decline in consumer spending matched a 0.9% decrease in February, 1984, and was the largest monthly decline since a 1.2% fall in December, 1960.

Personal consumption spending had been up 1.2% in September and 1.1% in August as consumers raced to take advantage of attractive cut-rate financing deals on new cars. With most of the discounts removed in October, auto sales slumped.

The Commerce Department report said sales of durable goods, including autos, plunged $40.1 billion at an annual rate in October.