Consumers Cut Spending; Durable Goods Orders Slide

US consumers cut spending during October at the steepest rate in more than seven years and orders for costly manufactured goods plummeted, according to Commerce Department reports on Wednesday that implied a steep recessionary downturn was at hand.

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Spending that fuels two-thirds of U.S. economic activity dropped 1.0 percent, its biggest fall since the attacks against the United States seven years ago in September 2001.

It was a fourth straight monthly fall in spending and underlined how a credit crunch, falling home prices and steady job losses were sapping consumers' will and ability to spend.

Orders for costly durable goods like cars, machinery and computers dropped by 6.2 percent in October, more than twice as much as Wall Street economists had forecast, as demand weakened across nearly every major sector of manufacturing.

"The durables is not a pleasant number. It's horrid across the board," said Boris Schlossberg, director of currency research at GFT Forex in New York.

Separately, a report from the Institute for Supply Management-Chicago showed business activity in the U.S. Midwest contracted more severely than expected. The barometer fell to 33.8 from 37.8 in October. Economists had forecast the index at 36.7. A reading below 50 indicates contraction.

"This provides yet more confirmation of the industrial collapse that's going on," said Pierre Ellis, senior economist at Decision Economics in New York.

The Chicago report added to buying momentum in U.S. fixed-income markets kicked off earlier by very weak October durable goods orders.

The only piece of relatively good news was a report from the Labor Department that new claims for jobless benefits fell by 14,000 last week.

But that still left claims at a seasonally adjusted 529,000, well above levels that economists typically associate with recessionary economic conditions.

A four-week moving average of claims that irons out weekly fluctuations climbed to 518,000 last week from 507,000 the week before, its highest reading since January 1983.

U.S. government bonds edged higher in price and the dollar slipped against the yen on the weak durable goods report, while stock index futures futures extended a retreat on evidence of more weakness at U.S. factories.

"The U.S. numbers this morning all have a negative tone to them and that should keep risk aversion higher," said Shaun Osborne, chief currency strategist at Toronto's TD Securities.

October's drop in durable goods orders was the sharpest since an 8.3 percent plunge in October 2006.

Demand for nearly every category of durable goods fell, including drops of 12.6 percent for primary metals, 6.8 percent for machinery and 11.1 percent for transportation goods.

Orders for non-defense capital goods excluding aircraft that are taken as a proxy for businesses' investment intentions fell 4 percent in October after decreasing 3.3 percent in September.

"These data suggest the downward slide in economic activity is intensifying as the year comes to a close," said William Sullivan, chief economist for JVB Financial Group in Boca Raton, Fla. "This shutdown in the credit markets is leaking over into the real economy."

Although consumer incomes were up 0.3 percent in October after a 0.1 percent increase in September, shell-shocked consumers chose to put more into savings. The savings rate rose to a still-modest 2.4 percent from 1 percent in September.

The drop in October spending was specially notable for costly goods that typically require financing, which has been hard to come by as wary lenders cut back on credit offers.

Spending on durable goods like new cars and refrigerators dropped at an annual inflation-adjusted rate of $43.8 billion in October after falling $43.5 billion in September.

Adjusted for inflation, real spending fell for five straight months through October.

The last time that real U.S. consumer spending fell for such a protracted period was over a five-month span from September 1990 to January 1991, the department said.

On Tuesday, the Federal Reserve and U.S. Treasury department announced that consumers were being thrown a lifeline in the form of a $200-billion facility to support consumer finance including student, auto and credit-card loans.

Until now, Treasury has directed its rescue efforts at bailing out banks and other financial institutions through injections of capital and other help.

But a steady weakening in consumer activity as jobs disappear heightens risks that a recession may be long and severe if spending keeps shrinking.

The weak October spending data coupled with falling manufacturing activity likely ensure that fourth-quarter gross domestic product, the broadest measure of total economic activity within U.S. borders, will shrink for a second straight quarter and so meet the technical definition of recession.

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