U.S. consumers retreat further into their wallets

Consumer spending dropped in September by the largest amount in four years, while incomes suffered because of Hurricane Ike.

The Commerce Department said Friday that personal spending fell by 0.3% that month, the biggest drop since June 2004. That followed flat readings in July and August, contributing to the worst quarterly performance in 28 years.

Incomes showed a 0.2% rise in September, just half the August increase, a slowdown that partly reflected the adverse effects of Hurricane Ike along the Gulf Coast.

The September spending decline was slightly worse than economists expected and confirmed that the economy hit a wall in the third quarter because of the weakness in consumer spending, which accounts for two-thirds of total economic activity.

The government reported Thursday that the gross domestic product, the broadest measure of economic health, declined at an annual rate of 0.3% in the third quarter, the strongest signal yet that the nation was falling into a recession even before the severity of the current financial crisis was fully felt.

With reports showing the ongoing financial crisis has driven consumer confidence to a record low, economists believe consumer spending will remain weak in the current quarter, sending overall GDP down by an even bigger amount. Some analysts are forecasting a drop of 1% to 2% in fourth-quarter GDP.

In a separate report, the Labor Department said Friday that wages and benefits paid to U.S. workers rose a moderate 0.7% in the third quarter, matching the gains in the previous two quarters.

The spending report showed that an inflation gauge tied to spending edged up a small 0.1% in September, and posted a 0.2% gain excluding energy and food. Prices over the last 12 months are up 4.2%, and have risen by 2.4% over the last year when food and energy are excluded.