U.S. Economy: Spending Increases Less Than Forecast (Update1)

By Joe Richter


Nov. 30 (Bloomberg) -- Consumer spending and incomes in the U.S. rose less than forecast in October, reinforcing Federal Reserve Chairman Ben S. Bernanke's warning of ``headwinds'' for the economy in coming months.

The housing slump and climbing fuel bills are wearing down consumers, whose spending has helped sustain the six-year expansion. Bernanke acknowledged late yesterday that market ``turbulence'' tied to the collapse of the subprime mortgage market may have harmed the economy.

``Consumer spending is off to a pretty weak start for the fourth quarter,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York. ``This helps confirm what is built into the market by now: that the Fed is likely to move on interest rates next month.''

The 0.2 percent increase in purchases followed a 0.3 percent gain in September, the Commerce Department said today in Washington. Incomes also rose 0.2 percent. Separately, the National Association of Purchasing Management-Chicago reported that its barometer of business activity climbed in November. The group's index rose to 52.9, from 49.7 the previous month.

Stocks advanced on speculation the weakening economy will force Bernanke and his colleagues to reduce borrowing costs on Dec. 11. The Dow Jones Industrial Average rose 0.5 percent to 13,371.72. Stocks were also boosted by talks between the Treasury Department and lenders to fix interest rates on subprime mortgages.

Purchases were little changed after adjusting for inflation, which are the figures used in calculating economic growth, the Commerce figures showed today.

Higher Inflation

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in October for a second month. It was up 1.9 percent from October 2006, matching the September increase which was revised higher.

Economists forecast spending would increase 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from no change to 0.5 percent.

Bernanke said in a speech in Charlotte, North Carolina, last night that ``uncertainty surrounding the outlook'' is ``even greater than usual,'' requiring the Fed to be ``exceptionally alert and flexible.''

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate next month, with a 30 percent probability of a half-point move.

Savings Drops

The inflation-adjusted change in spending was the smallest since March. The savings rate fell to 0.5 percent from 0.7 percent in September.

Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, dropped 0.6 percent, the biggest decline since June. Purchases of non-durable goods fell 0.1 and spending on services, which includes utilities and accounts for almost 60 percent of all outlays, increased 0.1 percent.

There are signs that high energy costs and falling home values are starting to weigh on consumers. Retail sales increased at a slower pace in October, the Commerce department said Nov. 14. A report earlier this month showed sales of cars and light trucks cooled in October.

Hudson, Ohio-based Jo-Ann Stores Inc. this week cut its 2008 earnings forecast because of ``increased uncertainty in consumer spending.'' Retail sales in November and December may rise 4 percent, the slowest gain since 2002, according to the National Retail Federation in Washington.

Spending Forecast

Consumer spending will grow at a 2 percent pace in the final three months of the year after rising 2.7 percent in the third quarter, based on the median estimate in a Bloomberg survey taken from Nov. 1 to Nov. 8. Reports since then suggest that forecast may prove too optimistic, economists said.

The Fed said economic growth slowed in seven of 12 U.S. regions from October through mid-November, with retailers ``slightly pessimistic'' about year-end holiday sales, according to their regional survey issued this week.

Reports on retail spending ``were downbeat in general,'' according to the report known as the Beige Book. Most Fed banks reported that retailers expect sales growth ``to be modest at best in the upcoming holiday season,'' the central bank said.