Car Sales Fuel Record Personal Spending

Even with the economy in a recession, Americans attracted by free auto financing deals pushed their spending up by a record amount in October while their incomes were stagnant.

The Commerce Department reported Monday that personal spending rose by an all-time high of 2.9 percent in October, led by a record increase in purchases of autos and other durable goods.

At the same time, personal incomes, reflecting the huge number of layoffs in the wake of the Sept. 11 terrorist attacks, showed no increase in October for the second straight month, the worst showing in more than seven years.

Americans' incomes after taxes actually fell during October, reflecting the layoffs and the fact that the government's tax refund mailings were coming to an end.

The 1.7 percent decline in after-tax incomes and the record increase in spending meant that Americans' personal savings rate dipped to a record low of 0.2 percent in October.

The record 2.9 percent increase in spending followed a large decline of 1.7 percent in September, when the U.S. economy came to a virtual halt as stunned Americans stayed out of the shopping malls in the aftermath of the terrorist attacks.

However, automakers succeeded in luring shoppers back into showrooms by offering attractive zero-interest-rate financing deals that triggered record auto sales in October.

Led by the huge jump in auto sales, sales of durable goods surged by a record 13.8 percent in October. Sales of nondurable goods posted a much smaller 0.5 percent gain while sales of services, the biggest spending category, rose by 12 percent.

However, the fact that incomes remained frozen in both September and October raises concerns about the future course of the economy. With Americans cutting back on their purchases because of rising job layoffs, economists are worried that consumer spending, which accounts for two-thirds of the total economy, will be trimmed sharply as well.

Last week, the National Bureau of Economic Research formally declared that the country had entered a recession back in March, the first downturn in a decade. The government reported that total economic activity fell at an annual rate of 1.1 percent in the July-September quarter.

Economists estimate the drop in the gross domestic product will be even more pronounced in the current quarter with some forecasting GDP will fall by 2 percent or more.

The Federal Reserve, which has already cut interest rates 10 times in what turned out to be an unsuccessful effort to keep the economy out of a recession, is expected to trim rates for an 11th time when they hold the central bank's last meeting of the year Dec. 11.

More optimistic economists say these rates cuts, combined with additional economic stimulus expected to be provided by Congress, will translate into a rebound early next year.

However, more pessimistic forecasters say the lingering worries from terrorism plus the huge job layoffs still to come will keep the recovery from beginning before the second half of next year.