WASHINGTON – The Commerce Department reported Thursday that spending plunged by 1.8 percent in September, following a modest 0.3 percent gain in August.
Consumer spending accounts for two-thirds of all economic activity and had been a main force keeping the economy afloat for more than a year. But economic fallout from the Sept. 11 attacks, including rocketing layoffs, plunging consumer confidence and billions of dollars in lost business, has likely pushed the country into recession.
The 1.8 percent drop was the largest decline since a decrease of the same amount in January 1987. The last time it was higher was in May 1960, when consumers cut spending by 1.9 percent.
Americans' personal income, which includes wages, interest and government benefits, was flat in September, reflecting the weakened state of the nation's labor market and the toll of the terror attacks. It was the worst showing since January 1994. In August, incomes rose by a tiny 0.1 percent.
Spending on durables - costly manufactured goods expected to last at least three years, such as cars and washing machines - fell by a sharp 3.2 percent in September, the biggest drop since January 1999. In August, spending on durable goods dipped by 0.3 percent.
Spending on nondurables, such as clothes and foods, declined by 1.3 percent, the largest drop since March 1993, after rising by 0.3 percent. Spending on services dropped by 1.8 percent, the biggest decline since the government began record-keeping in 1959. In August, spending on services rose 0.5 percent.
In another report, the Labor Department said new claims for unemployment benefits edged down last week by 10,000 to 499,000 but was still at a level that suggests an extremely weak labor market.
The economic picture is likely to get worse before it gets better, economists say.
Many economists predict the nation's unemployment rate jumped to 5.1 percent in October from 4.9 percent in September and that companies eliminated more than 280,000 jobs during the month. The government will release the employment report for October on Friday.
Economists fear consumers will spend a lot less if the employment situation seriously deteriorates.
The pullback in spending in September lifted the nation's personal savings rate - which is savings as a percentage of after-tax income - to 4.7 percent from 4.1 percent in August. It was the biggest increase the savings rate has seen since August 1998 when it rose by 4.9 percent.
In an effort to stabilize the teetering economy, the Federal Reserve cut interest rates nine times this year, with two rate reductions coming after last month's attacks. Many economists predict another cut when the Fed meets on Nov. 6.
President Bush, meanwhile, wants Congress to quickly pass a package to revive the economy that would include tax cuts and increased government spending.
The economy shrank at a rate of 0.4 percent in the July-September quarter, the biggest drop since the last recession in 1991, and a signal that the country may be heading toward a full-blown downturn. Many economists believe the economic output will decline by an even bigger amount in the current October-December quarter. A common definition of a recession is two consecutive quarters of declining economic output.
Consumer spending in the July-September quarter rose at a rate of just 1.2 percent, the slowest pace since the first quarter of 1993, and down from a 2.5 percent increase in the second quarter. The sharp slowdown underscored just how much of a toll the terror attacks, rising layoffs and the sour economy have had on the American consumer.