US consumer spending fell in October for the first time in five months and income growth stalled, leading some economists to cut already weak estimates of fourth-quarter economic growth.
Superstorm Sandy was partly to blame for the pullback in spending as the quarter started, but economists said the data on Friday also underscored the economy's fundamental weakness, stemming from the uncertainty over the course of fiscal policy.
The Commerce Department said consumer spending fell 0.2pc after a 0.8pc increase in September. Income growth was flat as wages and salaries dropped 0.2pc, in part because of work disruptions caused by the storm, which lashed the East Coast in late October.
But even stripping out the $18.2bn annual rate hit to wages and salaries from the storm, they would have been flat.
"What this is showing is the economy, broadly, is slowing in the fourth quarter and it is concern on the part of businesses and consumers with respect to the fiscal cliff," said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio.
The cliff refers to automatic government spending cuts and tax hikes early next year that could drain about $600 billion from the economy unless lawmakers and the Obama administration agree on a less painful plan to reduce budget deficits.
Fears an impasse could send the economy into a swoon undercut business spending in the third quarter. So far there is little sign of progress in Washington budget talks, which the top Republican in Congress on Friday said were at a "stalemate."
Inflation-adjusted consumer spending fell 0.3pc in October, the first decline since June, after rising 0.4pc the prior month.
It was the largest drop in real spending since September 2009 and implied growth in consumer spending this quarter would struggle to exceed the third-quarter's 1.4pc annual pace, which was the slowest in more than a year.
The data prompted economists to cut fourth-quarter GDP growth estimates, some quite sharply. Estimates now center between a 1pc and 1.8pc annual pace. The economy expanded at a 2.7pc rate in the third quarter.
"It's going to be challenging for real spending to grow above the third-quarter's pace. The fundamental drivers of spending are still sluggish," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
BUDGET TALKS KEY
And the risks to growth are rising. A second report showed that while factory activity in the Midwest rose in November for the first time in three month, new orders tumbled to their lowest level since June 2009.
U.S. financial markets were little moved by the reports as traders kept a wary eye on the budget talks in Washington. Prices for longer-dated U.S. government debt prices were trading down, while the dollar was steady against a basket of currencies. Stocks on Wall Street were little changed.
Major retailers on Thursday reported unexpectedly weak sales in November, which many pinned on Sandy.
Consumer spending is expected to bounce back by December as households replace goods damaged by the storm and income picks up as workers return to work. However, the magnitude could hinge on the outcome of the budget talks.
"If the discussions in Washington linger as they appear they are, then the pick-up in December would be less than it otherwise would be because you still have this level of uncertainty weighing on consumers," said Berson.
The income at the disposal of households after inflation and taxes dipped 0.1pc last month after being flat in September. Despite weak income growth, the saving rate - the percentage of disposable income households are socking away - rose to 3.4pc from 3.3pc the prior month.