Consumers keeping cash close to the vest

Consumer spending declined 0.3% in September in yet another sign that the economic slump is battering consumers, according to the Department of Commerce. The decline in spending, which was in line with analysts' estimates, was the largest since June 2004 and followed two consecutive flat months: July and August. Personal-consumption expenditures inched up 0.1% in September. Excluding food and energy prices, the index increased 0.2%. "People are pulling back on consumption, and this means that the economy is going to be slow for a while," said Jay Mueller, senior portfolio manager at Wells Capital Management of San Francisco, which has $250 billion in assets under management. "People see the bad headlines and the gyrations in the financial markets, and they are going to want to keep cash close to home. The falling consumption is a piece of the overall deleveraging theme that we will see in the upcoming months." Meanwhile, incomes increased 0.2% in September, compared with a 0.4 increase in August. That’s partly because of the fallout of Hurricane Ike, which hit the Gulf Coast on Sept. 13. The storm cut rental payments and earnings from businesses that were affected by the tumultuous weather. On Wednesday, the Federal Reserve cut the federal funds rate by half a percentage point to 1%, noting that the "financial market turmoil is likely to exert additional restraint on spending." Gross domestic product fell 0.3% in the third quarter in the most telling sign that the economy is falling into a recession. Two consecutive quarters with a negative gross domestic product is defined as a recession.