Battered consumers, faced with weak income growth and rising inflation, trimmed their spending in August by the largest amount in nearly a year.
The Associated Press reported that the Commerce Department said Friday (Sept. 29) that consumer spending, after adjusting for inflation, dropped by 0.1% last month, the first decline since a 0.3% 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% in August, the weakest performance in nine months. Core inflation, which excludes energy and food, was up a worrisome 2.5% 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% 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.