Battered consumers, faced with weak income growth and rising inflation, trimmed their spending in August by the largest amount in nearly a year. The Commerce Department reported Friday that consumer spending, after adjusting for inflation, dropped by 0.1 percent last month, the first decline since a 0.3 percent fall in September 2005, a month when business activity was disrupted by Hurricane Katrina.
Incomes, reflecting lackluster gains in employment, rose by just 0.3 percent in August, the weakest performance in nine months. Core inflation, which excludes energy and food, was up a worrisome 2.5 percent compared to a year ago, the biggest year-over-year increase in more than a decade.
The new report underscored how much the economy is slowing this year as consumers have been battered by record-high gasoline prices and a cooling housing market. Falling home prices are making Americans more cautious about spending money because they feel less wealthy.
The overall economy grew at an annual rate of just 2.6 percent in the April-June quarter, the government reported Thursday, and the new report on consumer spending indicates that growth will likely slow even more in the current quarter.
However, most economists believe the country will be able to escape an outright recession, in part because trends in recent weeks have been more favorable with gasoline prices falling rapidly, helping to boost consumer confidence.
That development is expected to bolster consumer spending in the final months of this year, giving retailers a decent Christmas sales season. Consumer spending is closely watched because it accounts for two-thirds of total economic activity.
Consumer spending before adjusting for inflation showed a tiny 0.1 percent rise, far below the 0.8 percent jump in the previous month.
After removing inflation, the 0.1 percent decline in spending followed a 0.5 percent rise in July. Much of the slowdown reflected a drop in auto sales in August following a strong July.
The 0.3 percent rise in incomes followed a 0.5 percent July gain and was the weakest showing since incomes edged up just 0.2 percent last November.
After-tax incomes were up 0.4 percent in August, the weakest increase since a similar 0.4 percent gain in May.
Americans' savings rate came in at a minus 0.5 percent, compared to a minus 0.7 percent in July. That marked the 17th consecutive month that the savings rate has been in negative territory. That means that Americans are spending all of their after-tax incomes and dipping into savings or borrowing to finance their purchases.
Overall prices, by a gauge of inflation tied to the consumer spending numbers, rose by 0.2 percent in August, after excluding energy and food. The 2.5 percent rise in this core measure over the past 12 months was the biggest increase since a similar 2.5 percent 12-month rise in April 1995.
That increase is well above the Federal Reserve's comfort range of core inflation increases between 1 percent and 2 percent. However, many economists believe the central bank, after raising rates for 17 consecutive times over two years, is through with its credit tightening, believing that a slowing economy will restrain inflation pressures going forward.