Consumers Save, Factories Struggle After Sept. 11

Investors on Thursday got another reminder of the Sept. 11 attacks' sharp and painful toll on the nation's economy in a new batch of dismal reports.

U.S. consumer spending fell at its fastest pace in more than 14 years in September and the factory sector plunged into its deepest slump since the 1990-91 recession in October as the economic shockwaves from the attacks proved more damaging than feared.

The Commerce Department said consumer spending sank 1.8 percent in September — double economists' forecasts — after a 0.3 percent gain in August.

It was the first decline in the economy's most important prop in 2-1/2 years, and its steepest fall since Jan. 1987. Personal incomes were flat even though tax rebate checks continued to land in American mailboxes.

As consumers saved more and spent less, new orders for manufactured goods fell at one of the sharpest rates on record, driving factories to swiftly curtail production and lay off more workers, an industry report showed.

The National Association of Purchasing Management (NAPM) said its monthly gauge of factory activity plunged to 39.8 in October — its lowest level since Feb. 1991 — from 47.0 in September, and far worse than forecasts for a 44.3 reading.

Government Securities.

'No Silver Lining'

"It's another nail in the coffin for the economy," said Oscar Gonzalez, economist at John Hancock Financial Services Inc. "There is no silver lining. There is nothing to grab onto to suggest the economy is ready to climb out of a hole."

A number under 50 signals contracting manufacturing activity; the NAPM index has held below that watershed since August 2000.

The NAPM report marked an abrupt setback for a sector that had been trying to claw out of its 15-month slump, but now looks set to struggle through next year.

With consumer spending accounting for some two-thirds of U.S. economic activity, and manufacturing another sixth, the two reports signaled the economic contraction which began in the third quarter was only gaining momentum into the fourth.

Furthermore, the government said U.S. construction spending fell for the fifth month in a row in September, declining 0.4 percent, while nearly half a million Americans lined up to claim first-time unemployment insurance last week.

The day's numbers were a grim prelude to Friday's crucial nonfarm payrolls report, which is expected to show the economy shed another 289,000 jobs in October and the unemployment rate rose to 5.2 percent from 4.9 percent.

Economists' greatest fear is that rising unemployment while the nation is fighting a war in Afghanistan and reeling from a bioterrorism scare at home will cause consumers to further scale back their spending, driving the economy into an ever deeper slump.

"Clearly, an unemployed person will have a difficult time taking advantage of lower rates for new purchases," said Tom Sowanick, chief fixed-income strategist at Merrill Lynch Government Securities.

Fed Cut Expected

The weak economic reports may nurse hopes the Federal Reserve will slash interest rates at its next meeting on Nov. 6 by 50 basis points. Those hopes were dimmed on Wednesday after the GDP report showed the economy shrank less than expected. 

To revive the economy, the Federal Reserve cut interest rates nine times this year, with two rate cuts coming after the attacks. 

Economists hope the Fed's action and expectations that Congress will approve new tax cuts and boost spending will lead to a rebound next year.

The one bright spot in the drumbeat of bad news was early reports of stellar October sales by major automakers, who lured consumers at the dawn of a recession with too-good-to-resist low and zero financing deals.

Ford Motor Co., for example, reported a sharp 34.4 percent gain in U.S. vehicle sales over last year.

"Even miserable consumers know a bargain," said Ian Shepherdson, chief U.S. economist at High frequency Economics.

But while those sales may help automakers clear out inventory, the cheap financing deals and price cuts may end up cannibalizing future demand. 

And while October may have been good for car sales, the NAPM report offered a grim outlook for the broader manufacturing sector.

The NAPM new orders component, a key gauge of pipeline demand for factory goods, plummeted to 38.3 in October from 50.3 in September.

"It would appear to me that we have been set back six to nine months," said Norbert Ore, chairman of NAPM's business survey committee.

Reuters and the Associated Press contributed to this report.