Consumer Spending in U.S. Probably Dropped by Most in 7 Years

Consumer Spending in U.S. Probably Dropped by Most in 7 Years

The U.S. sank into a deeper recession as consumer spending, the biggest part of the economy, dropped in October by the most since the 2001 contraction, economists said before a government report today.

By Shobhana Chandra

Nov. 26 (Bloomberg) -- The U.S. sank into a deeper recession as consumer spending, the biggest part of the economy, dropped in October by the most since the 2001 contraction, economists said before a government report today.

Purchases fell 1 percent after declining 0.3 percent in September, according to the median forecast in a Bloomberg News survey. Orders for long-lasting goods, sales of new houses and consumer sentiment also fell, other reports may show.

The biggest spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook at retailers from Zale Corp. to Best Buy Co. Faltering demand has caused the Federal Reserve, Treasury and President-elect Barack Obama to ratchet up plans to ease the credit crisis.

“Consumers are likely to continue to pare back spending,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. The pullback is “setting the stage for a bleak holiday shopping season.”

The Commerce Department’s spending figures are due at 8:30 a.m. in Washington. Estimates of the 72 economists surveyed ranged from declines of 0.4 percent to 2 percent. Incomes probably grew 0.1 percent, the smallest gain in three months, the survey also showed.

Also at 8:30 a.m., Commerce may report that orders for durable goods, those meant to last several years, fell 3 percent in October, according to the survey. Excluding transportation equipment, orders probably fell 1.6 percent, a third consecutive decline.

Sentiment Fades

The Reuters/University of Michigan’s final estimate of consumer sentiment for this month, due at 10 a.m., probably fell, approaching June’s 28-year low, according to the survey median.

A jump in firings is one reason Americans’ moods have darkened. A Labor Department report at 8:30 a.m. may show initial claims for jobless benefits last week held close to the 16-year high reached the prior week, according to the survey.

Retailers are concerned about the November-December holiday season, which brings in one-third or more of annual revenue. Zale, the biggest U.S. jewelry chain by stores, yesterday rescinded its annual forecast, saying in a statement that it “does not believe it can reliably gauge likely holiday performance or sales in the balance of fiscal 2009.”

Today’s spending report is also likely to confirm that inflation is retreating as demand wanes. The Fed’s preferred price gauge, which is linked to purchases and excludes food and fuel costs, was probably unchanged in October, according to the survey median. It would be the first time in almost two years it didn’t increase.

Bigger Drop

Consumer spending dropped at a 3.7 percent annual pace in the third quarter, more than the government had previously forecast and the biggest plunge since 1980, revised Commerce figures showed yesterday. The economy shrank 0.5 percent, also faster than initially estimated. more