The Marketplace Report: Consumer Spending Plunges

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Do the latest economic indicators portend a U.S. recession? Madeleine Brand talks to Bob Moon of Marketplace about September's plunge in consumer spending.

MADELEINE BRAND, host:

Back now with DAY TO DAY. I'm Madeleine Brand.

The country's financial picture has turned a lot darker. The government reports today that the hurricanes have pushed incomes down and prices higher. That has some economists talking about a possible recession. "Marketplace" New York bureau chief Bob Moon joins us with more on this.

And, Bob, I thought the consensus was just the opposite, that the hurricane did not cause widespread economic damage.

BOB MOON ("Marketplace"): Well, that's true, Madeleine. Most economists are still hopeful that we can escape any extended economic downturn. They do expect at least a downturn of several months here. But today's news on the aftermath of Hurricane Katrina in particular is really dramatic. Consumer spending plunged a full percentage point in August, which is the biggest drop since the terror attacks of 9/11/2001. That's especially troublesome when you figure that consumer spending accounts for two-thirds of the US economy, so this raises the big question of: Will consumers be distressed enough by even higher gasoline prices that the economy might be pushed into a full-blown recession?

There is even more reason for concern. We've got the numbers out today also on personal income. The Commerce Department says if it hadn't been for the disastrous weather, incomes would have gone up by 2/10ths of a percent. Well, instead, they went down a tenth of a percent in August.

But wait, there's more. One more thing that could sap our wallets in the coming months: Inflation is on the rise, and not just energy prices. Overall consumer inflation was up half a percent in August; that's the biggest jump in almost five years. That number includes energy prices. If you factor those out, the volatile energy and food costs, though, inflation was still up 2/10ths of a percent. So all in all, a whole basket of bad economic news today.

BRAND: Some grim news, indeed. And so does that mean if inflation's on the rise that the Fed will continue to raise interest rates?

MOON: Well, undoubtedly so, it would seem. Economists say, if anything, today's news makes the case more compelling for continuing the interest rate hikes that the Fed hopes will hold back this inflation. The Fed has really seen this storm disaster cutting both ways here. It has said that it will hit economic growth, but that this hit is likely to be temporary, and that's good news that it'll be short-term. But the higher energy prices could add to the inflationary pressures for some time to come, and the suggestion is that the Fed intends to stay the course here with their interest rate hikes.

BRAND: Any good news in today's numbers?

MOON: Well, I can offer you one ray of hope here. The Chicago Purchasing Managers Index rose sharply in the past month. Now that's a sign that factory activity in the Midwest is actually gearing up after what was a brief contraction in August. Analysts are seeing that as an indication that the disastrous weather might actually be having a positive effect on factory workers, and it's also likely to build as the government's massive rebuilding expenditures kick in over the coming months.

But I have to say that overall, the economic news is really not good today. One other thing that has economists concerned: the personal savings rate. It's down 7/10ths of a percent, and that means that Americans are not only spending all their income, but they're dipping into savings.

Today in the "Marketplace" newsroom, it's Michael Eisner's last day of work at Disney. We're taking a look back at his stormy reign over the Magic Kingdom.

BRAND: Bob Moon of public radio's daily business show "Marketplace." And "Marketplace" is produced by American Public Media.

Thanks, Bob.

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