A wobbly economy took a couple more punches Friday in the form of negative reports on consumer spending and manufacturing.
Cautious consumers, shaken by the turbulent stock market and a possible war with Iraq, cut their spending in September by 0.4 percent, the largest decline in 10 months, the Commerce Department reported.
The pullback, led by a reduction in spending on big-ticket goods such as cars, followed a solid 0.4 percent gain in August and came about even though Americans’ incomes grew by 0.4 percent.
Economists were expecting a 0.2 percent fall in spending and a 0.5 percent jump in income.
“We are clearly hitting a soft spot with consumers worried about just about everything in the world from Iraq to terrorists,” said David Wyss, chief economist at Standard & Poor’s in New York.
“I am not sure that they are going to bounce out of this. It could be a rather blue Christmas for retailers.”
Spending on big-ticket goods such as cars and appliances dropped by a sharp 5.1 percent after a 1.9 percent increase in August. Spending on non-durable goods, such as food and clothing, dipped by 0.1 percent.
In a second report, the Institute for Supply Management said its index of manufacturing business conditions fell in October to 48.5, down from 49.5 in September and its lowest level since December.
It was the second month in a row that the index has dropped.
“It doesn’t suggest a collapse,” said James O’Sullivan, senior economist at UBS Warburg in Stamford, Conn. “It doesn’t suggest that the economy as a whole is contracting. But manufacturing appears to have turned down again, modestly.”
The drop was in line with economists’ forecasts and was much smaller than many had feared after a dismal Chicago-area survey released Thursday. Still, the ISM index remained under 50, which denotes contraction.
“The sector lacks drivers at this point,” said Norbert Ore, director of the ISM survey, adding that business capital spending remains very soft and some executives are worried about the impact a war with Iraq could have on business.
The employment segment of the index was virtually unchanged, edging up to 45.0 from 44.9. “It would be wrong to assume employment will turn the corner any time soon,” Ore said.
The new orders index, a barometer of future production, rose to 50.9 from 50.2 in September.
The Commerce Department also announced that spending for new construction increased 0.6 percent in September, but even this upbeat report contained some bad news.
Non-residential construction fell to $156.2 billion, off nearly 19 percent from September 2001 and the lowest level since July 1996, as business spending cuts held back commercial projects. Construction of factories, offices and stores posted multiyear lows.
But strength in home building and public works more than offset that weakness, with outlays for all construction spending rising to a seasonally adjusted annual rate of $836.7 billion. Residential construction rose to a pace of $413.7 billion from $410.7 billion in August.
“Residential construction is very strong, but it’s reached such a high level that it’s growing slowly,” said Stephen Stanley, an economist for RBS Greenwich Capital.
And while the public building sector has held up well, he said, reports of state and local budget deficits suggest construction spending in that sector may begin to ease.
Hardest hit was the construction of industrial facilities, which were down to $14.3 billion, falling 50 percent from a year ago to the lowest level since May 1978.
