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Anxiety Rises As Spending Slackens

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By MARTIN CRUTSINGER, The Associated Press

Published: December 1, 2007

WASHINGTON - Consumers battered by a slumping housing market and a credit crunch slowed the growth in spending to the smallest amount in four months. In another sign of weakness, construction activity fell by a larger-than-expected amount.

The Commerce Department reported Friday that consumer spending edged up 0.2 percent in October, the weakest showing since a similar increase in June. Individual incomes grew by just 0.2 percent last month, the poorest showing in six months.

Meanwhile, a separate Commerce report showed that construction spending fell by 0.8 percent last month, the biggest decline since July. Activity in the besieged housing industry fell for a 20th straight month while nonresidential construction weakened as well.

The weakness in consumer spending, incomes and construction raised new worries about spreading economic weakness caused by the steepest slump in housing in more than 20 years and a widening credit crisis triggered by rising mortgage defaults. Consumers also are being battered by surging prices for gasoline and other energy products.

"Consumers are still spending though not nearly at the pace they had been," said Joel Naroff, chief economist at Naroff Economic Advisors.

While economists are expressing growing concerns about a possible recession, Federal Reserve Chairman Ben Bernanke signaled in a speech Thursday night that the central bank is prepared to cut interest rates further if needed to keep the country out of a full-blown downturn.

His comments followed similar remarks by Fed Vice Chairman Donald Kohn and have raised hopes that the central bank, which has cut rates at its last two meetings, will reduce them further when Fed officials meet again on Dec. 11.

Bernanke and other Fed officials have said the central bank needs to make sure that inflation pressures do not get out of hand given the recent jump in oil prices to nearly $100 a barrel.

They got good news on that front Friday. A gauge of core inflation tied to consumer spending edged up 0.2 percent in October and is up only 1.9 percent over the past year. That increase is within the Fed's 1 percent to 2 percent comfort range for core inflation, which excludes energy and food.

The 0.8 percent drop in construction was far bigger than the 0.2 percent dip that had been expected. Private residential construction fell by a sharp 2 percent, the 20th straight decline in this troubled sector.

Private nonresidential construction, which had been helping to cushion the housing downturn, dropped by 0.5 percent, the first decline in this category in 13 months. The only strength came in government activity, which was up 0.8 percent as spending on state and local projects hit an all-time high.

Analysts said the 0.2 percent gain in consumer spending represented a slow start to the fourth quarter with even further weakness expected as the full impact of recent declines in consumer confidence weigh on spending during the current holiday shopping season.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that he thinks consumer spending would rise by just 1 to 1.5 percent in the current quarter and he said a reading below 1 percent can't be ruled out. In the third quarter, consumer spending posted a solid 2.7 percent rate of increase.

October's 0.2 percent spending advance was slightly below the 0.3 percent increase that analysts had been expecting. Consumers' spending is closely watched because it accounts for two-thirds of total economic activity.

The government reported Thursday that the overall economy, as measured by the gross domestic product, roared ahead at a 3.9 percent annual rate in the July-September quarter. However, that pace is expected to slow in the current quarter to less than half that pace.

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