Recession fears as US spending slows

Fears of US slowdown grows

The average American's personal income fell for the first time since 1998, and consumer spending rose by the smallest amount in six months, in the latest set of figures to show a sharply-slowing US economy.

US Commerce Department figures show personal incomes falling 0.2% and consumer spending rising a lower than expected 0.2% in October.

The bottom line here is that these numbers are deteriorating faster than we expected

Ian Shepherdson, High Frequency Economics

Market observers had predicted income to rise by 0.2% and spending to rise by 0.3%.

The news weakened both the dollar and the US stock market, with the Nasdaq market of high-tech issues falling another 5% to a year-long low.

On Tuesday, the government had reported that the economy grew at an annual rate of just 2.4% in the third quarter of the year, compared to more than 5% in the previous quarter.

"The bottom line here is that these numbers are deteriorating faster than we expected," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Farm subsidy blip

The fall in incomes was due largely to a big swing in federal subsidy payments to farmers.

The payment soared in September before returning to normal levels in October.

Without these big changes, personal incomes would have risen 0.4% in September, and instead of falling in October the average income would have risen by 0.5%.

Meanwhile, the Labor Department reported that the number of Americans filing new claims for unemployment benefits rose last week to 358,000, the highest level in more than two years.

The increase in new claims from the previous week was an unexpectedly large 19,000, although the Thanksgiving holiday may have distorted the week-by-week figures.

Up until recently, the US economy was creating millions of jobs and the unemployment rate was falling.

Interest rate fears

The slowdown follows a series of interest rate rises which is having an effect on cooling the economy.

The fall in the stock markets, and the increased price of oil, have also made people fell less well-off, leading to a decline in spending.

Adding the results from Tuesday's consumer confidence report, which showed confidence declined to its lowest level in over a year, "it is clear that consumers are becoming decidedly more cautious and conservative," said Wayne Ayers of FleetBoston.

Although the evidence suggests to many that there will not be any further interest rate rises, the question remains whether the economy can be successfully cooled without recession.

Most observers believe that, after eight years of steady expansion, the US economy is bound to slow down - but managing that decline without more pain for the domestic and international economy could prove a tricky task both for the Fed, the US central bank, and the new US adminstration which will take office in January.