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Sandy slowed U.S. consumer spending and pay in October

A sign advertises a sale last month on a storefront in Philadelphia. The Commerce Department said Friday that consumer spending dropped 0.2 percent in October. 

Associated Press

A sign advertises a sale last month on a storefront in Philadelphia. The Commerce Department said Friday that consumer spending dropped 0.2 percent in October. 

WASHINGTON — Americans cut back on spending last month while their incomes remained flat. The weakness in part reflected disruptions from Hurricane Sandy that could slow economic growth for the rest of the year.

The Commerce Department said Friday that consumer spending dropped 0.2 percent in October. It was the weakest figure since May, and it compared with a 0.8 percent spending increase in September. Income had risen 0.4 percent in September.

Work interruptions caused by the storm reduced wages and salaries in October by about $18 billion at an annual rate, the government said. The storm affected 24 states, with the most severe damage in New York and New Jersey.

Consumers may also be scaling back on spending because of fears about the "fiscal cliff," the automatic tax increases and spending cuts that will take effect in January if Congress and the Obama administration fail to strike a budget deal by then.

"The upshot is that although both incomes and spending will probably bounce back in November, the underlying trend is weak," said Paul Dales, senior U.S. economist at Capital Economics.

The depressed spending figures suggest that the economy is growing more slowly in the October-December quarter than it did in the July-September quarter. Dales predicts U.S. economic growth will tumble from the 2.7 percent annual rate in the July-September quarter to a weak 1 percent in the October-December period. That's too low to lower the unemployment rate, now at 7.9 percent.

After-tax income adjusted for inflation fell 0.1 percent in October. And spending, when adjusted for inflation, dropped 0.3 percent — the biggest such decline in three years.

The saving rate edged up slightly to 3.4 percent of after-tax income in October, compared with 3.3 percent in September.

Many economists say growth will rebound in 2013 once the rebuilding phase begins in the Northeast.

And if President Barack Obama and Congress can reach a budget deal to avoid the fiscal cliff, some economists, including Federal Reserve Chairman Ben Bernanke, are predicting a strong year for the economy.

Still, the storm's impact has slowed sales in the nation's most densely populated region ahead of the crucial holiday shopping season.

The International Council of Shopping Centers said 18 major retailers reported that sales rose 1.7 percent in November, compared with the same period a year ago. The group had been expecting sales growth of between 4.5 and 5.5 percent.

The economic damage from the storm may be starting to fade, though. Retailers are reporting solid sales over the Thanksgiving Day holiday weekend.

And applications for unemployment benefits have fallen from an 18-month high in the first week of November. That surge was driven by applications in New York, New Jersey, Pennsylvania and Connecticut.

Still, the increase in unemployment applications earlier in November will probably depress job growth for the month. Many economists predict that net job growth for November will range between 25,000 and 75,000 — well below the 171,000 jobs that were added in October.

Sandy slowed U.S. consumer spending and pay in October 11/30/12 [Last modified: Friday, November 30, 2012 8:50pm]
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