US consumers reel at fuel hikes

Gasoline prices above $3 a gallon have curbed spending

The US economy is feeling the twin impact of soaring energy prices and Hurricane Katrina, with both consumer spending and confidence falling.

Consumer spending fell 0.5% in August - the largest monthly fall in nearly four years - reflecting the recent rise in gasoline and domestic fuel prices.

Gasoline climbed above $3 a gallon for the first time after Hurricane Katrina.

And the government estimated that the hurricane destroyed uninsured property worth $100bn in four Southern states.

Meanwhile, consumer confidence, as surveyed by the University of Michigan, dropped by more than expected in September.

The index of consumer sentiment dropped to 76.9 in September, from 89.1 in August, the biggest drop in two years.

Confidence blow

Figures published on Friday also showed a 0.1% fall in personal incomes, due largely to damage wrought by Katrina.

Economists had expected rising fuel costs to eat into household expenditure, but the fall in spending was larger than expected.

When adjusted for inflation, consumer expenditure dropped 1%, the steepest monthly fall since the 11 September 2001 attacks.

The higher cost of fuel also pushed up consumer inflation, which rose 0.5% last month.

Aside from rising fuel costs, analysts said spending was hit by a sharp drop in new car sales, caused by a reduction in employee discounts.

"On spending, the entire surprise was in durables," said Michael England, chief economist at Action Economics.

"We expected a big impact in that sector, but it was even bigger than anticipated."

Economic impact

Personal incomes would have risen 0.2% had it not been for Katrina.

Economists are divided over the likely impact of hurricanes Katrina and Rita on future economic growth.

The US Congressional Budget Office said on Thursday that the damage caused by the two hurricanes would clip 0.5% off GDP in the second half of the year.

However, some economists believe it will reduce GDP growth by 1% alone in the current quarter.

And there is a belief that recovery efforts in 2006 will boost the economy.