Consumer spending falls as Clunkers program ends

The end of the popular "Cash for Clunkers" program sank consumer spending in September, according to new government data released Friday, but economists say shoppers remained resilient.

Overall, spending fell 0.5 percent in September from the previous month, the biggest decline in nine months. That was primarily due to a 7.2 percent slump in purchases of durable goods, fueled by the expiration of a government credit of up to $4,500 to buy new, fuel-efficient cars.

But spending on nondurable goods such as clothing rose 0.5 percent in September, while purchases of services rose 0.1 percent. And the amount spent overall last month was the second highest of the year.

"I'm not at all discouraged," said Bernard Baumohl, chief economist of the Economic Outlook Group, a consulting firm. "It is remarkable that even with the precipitous fall . . . we still saw a relatively strong amount of consumer spending."

Wall Street, however, did not seem to agree. The major stock indexes plunged at least 2.5 percent over concerns that federal stimulus spending -- such as Cash for Clunkers -- has masked underlying weakness in the economy. Much of the 3.5 percent increase in gross domestic product during the third quarter was attributed to stimulus programs.

The strength of consumer spending during the next couple of months could determine whether the country pulls out of the recession this year. Consumer spending is the engine of the economy, accounting for roughly 70 percent of gross domestic product. A spirited return to the stores -- or a Scrooge-like slump -- could swing the pendulum.

"I am hopeful that the job market is going to start to turn around before the end of this year," said William Cheney, chief economist at John Hancock Financial Services. "In that case, you might get a decent holiday season."

Citigroup managing director Steven Wieting said fears of potential job losses sent sales of discretionary merchandise down 9 percent last year. As concerns about layoffs ease, consumers are more likely to open their wallets. Wieting predicts that sales this holiday season at national chain stores open at least a year -- a key measure of health in the industry -- will rise as much as 1 percent compared with last year.

But Wieting said shoppers may have to combat higher energy costs this winter. Consumer energy prices have risen about 7 percent this year, eating into consumers' budgets for the discretionary purchases that are the lifeblood of the retail industry, he said.

Shoppers also are not making more money and saving the cash they do have. Personal and disposable income remained flat in September from the previous month, according to government data released Friday, while the savings rate increased to 3.3 percent.

In addition, consumer confidence fell in October for the third consecutive month, driven by the tight labor market, according to the Conference Board. Americans' assessments of their present situation is at the worst level in 26 years, the group said.

The survey was completed before Thursday's report of gross domestic product growth. But it highlights the struggle consumers face to put the recession behind them.

"The holiday season is just a big wild card, and everybody's going to be watching it like a hawk to see what happens," Cheney said. "I don't think it's really that predictable."