Consumer Spending Turns Down
People kept a firmer grasp on their wallets in September after spending freely the previous two months, the Commerce Department said Friday.
Consumer spending fell 0.3% after rising a revised 1% in July and 1.1% in August, the department said. The drop in September was the largest in a year.
Adjusted for inflation, September spending looked even worse, slumping 0.6%.
The report came on the heels of Thursday’s news that the economy soared at a 7.2% annual rate in the third quarter, its best showing since 1984. Consumer spending rose during the quarter at an annualized rate of 6.6%.
The difference between the impressive quarter and the weak September reflected the diminishing effect of tax cuts, economists said.
At the end of July and the beginning of August, the government mailed out $13.7 billion in tax credit checks. In addition, a drop in the tax withholding rates for paychecks took effect in July.
According to Briefing.com, economists had been expecting only a 0.1% decline in personal spending. Still, there was little alarm at the greater drop. Joel Naroff of Naroff Economic Advisors in Holland, Pa., said it was spending “simply trending down to a more normal level.”
Accounting for most of the increase in August and decrease in September was one thing: cars. The tax cuts, coupled with end-of-the-model-year sales, “moved the metal,” Naroff said.
Consumers didn’t need the official numbers about the best quarter in nearly two decades to feel happier. The University of Michigan’s index of consumer sentiment, also released Friday, jumped from 87.7 in September to 89.6 in October.
The index, based on nationwide surveys, records people’s feelings about their economic well-being.
Last winter, the index was below 80, a sharp tumble from the heady heights of 110 it reached at the peak of the last expansion, in early 2000.
Encouraging consumers to keep their wallets closed in September was the fact that they were a little emptier. Disposable personal income fell 1% after rising 1% in August.
Most economists expect the third quarter’s recovery to continue, although at a less spectacular pace. But they caution that it will have to include a pickup in hiring. More than 2.7 million jobs have disappeared since the start of the last recession.
“What is still missing from this recovery is robust job creation, but we expect that to arrive in the coming months,” said N. Gregory Mankiw, chairman of the White House Council of Economic Advisors, in an online chat on the White House Web site Friday.
Noting that inventories fell in the third quarter, Mankiw called it “probably a good sign. Inventories are very lean, which suggests that firms will need to pick up production to replenish inventories. Higher production should lead to more hiring.”
