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Katrina Slams Consumer Spending

Hurricane Katrina (search) caused $100 billion in uninsured losses in August while consumer spending plunged by the largest amount since the September 2001 terrorist attacks, the government reported Friday.

Because of the devastation along the Gulf Coast (search), personal incomes fell by 0.1 percent in August, the Commerce Department reported. Incomes would have risen by 0.2 percent had it not been for the hurricane.

In another worrisome sign for the economy, consumer spending, after adjusting for inflation, plunged by 1 percent in August, the biggest decline since September 2001, as consumers pinched by soaring gasoline prices cut back in spending in other areas.

The sharp drop in spending raises concerns about consumers' staying power in the face of soaring energy bills. Consumer spending is closely watched because it accounts for two-thirds of the economy.

Analysts said the toll from Katrina and Hurricane Rita (search), which struck in September, is likely to depress economic activity for several months.

The worry is whether the surge in energy prices, partly reflecting the shutdown in production along the Gulf Coast, will so rattle consumers that the economy could be pushed into a full-blown recession. The Conference Board reported a sharp drop in consumer confidence in September.

Analysts, however, believe that the spike in energy prices seen in August and early September will not be enough to shut down consumers' appetite to spend on other items, although they are forecasting that economic growth in the current July-September quarter will be lowered by as much as a full percentage point.

The 1 percent drop in spending after adjusting for inflation compared to a 0.5 percent decline in spending before inflation was taken out. The difference largely reflected the fact that consumers were buying more expensive gasoline to fill up their cars during the month.

Income after adjusting for taxes fell by 0.1 percent in August after an increase of 0.4 percent in July.

Americans' personal savings rate remained in negative territory in August at minus 0.7 percent. That compared to a minus 1.1 percent personal savings rate in July, which had been the all-time low.

When the savings rate is in negative territory, it means that Americans are not only spending all of their after-tax income but they are dipping into savings accumulated in earlier months to finance spending.