THE ECONOMY : Personal Income Rises 0.9% in October

The personal income of Americans rose a healthy 0.9% in October, but they socked away more of the money into savings accounts and cut spending by 0.2%, the Commerce Department said Thursday.

Economists said the rise in income, the biggest since March, could eventually fuel spending, but the fourth quarter is already looking quite weak.

“Consumers are being extremely cautious, and spending will be flat or down in the fourth quarter,” said economist Bruce Steinberg at Merrill Lynch. “I also think Christmas sales will be weak.”

The department said savings amounted to 5.7% of disposable income, a full percentage point higher than in September. The October rate was also the highest since June, when it reached 5.8%.

Economists said the return of the savings rate to its long-term average of around 6% is a healthy sign for the economy because it can ease pressure on interest rates and stimulate business investment.

After a summer of robust, incentive-driven car sales, consumers cut back sharply on auto purchases, leading to the first overall spending decline in a year and the largest drop since a 1.4% fall in January, 1987.

“We’re getting good, solid growth in wage earnings, which will eventually be positive for consumption,” said economist Stephen Roach at Morgan Stanley & Co. “In the October report, consumption was very weak, but that was the obvious result of a plunge in the auto component.”

Consumer spending accounts for about two-thirds of demand for the economy’s goods and services, and a decline in this key component could lead to a downturn in economic growth.

The department reported on Wednesday that the economy expanded by 2.7% in the third quarter, boosted by the biggest rise in spending since the first quarter of 1988.

The October spending report supported the view of lower fourth-quarter growth, although the decline was confined to the auto sector, which has been much weaker than the rest of the economy.

Durable goods purchases, mostly cars, fell by 5.9% after a 2.2% drop in September. Purchases of non-durable goods, like food and fuel, rose by 0.2% in October.

Services have been one of the strongest pillars of economic growth lately, and spending in this sector rose by a strong 1.1% after a 0.5% gain in September.

The sharp rise in income was supported by a 1.2% increase in wages during the month, coming after a 0.7% gain in September. Part of the October rise reflected one-time bonus payments to auto industry workers.

The department said the San Francisco Bay Area Quake in October and Hurricane Hugo in September pared income growth in both months. But income got a boost from government subsidy payments to farmers in October.

Excluding those special factors, income rose a healthy 0.7% in October after a 0.6% gain in September, the department said.