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October 31, 2014 8:40 AM, EDT

Consumer Spending Drops as Incomes Cool

Ron Antonelli/Bloomberg News

Consumer spending in the U.S. unexpectedly dropped in September as incomes rose at the slowest pace of the year, indicating the economy will have difficulty sustaining a pickup in growth into the end of the year.

Expenditures decreased 0.2% last month, weaker than any economist projected in a Bloomberg News survey, after rising 0.5% in August, Commerce Department figures showed in Washington. Incomes increased 0.2%, the smallest gain since December.

Wages that are barely outstripping the pace of inflation may be restraining spending by some households, while slower increases in home prices and volatility in the stock market is also limiting wealth gains.

“We had an extremely strong month in August and there’s going to be an ebb and flow in the consumption profile,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets. In addition, “consumers have saved a good portion of the wage growth that we experienced this year.”

The median estimate of 81 economists in a Bloomberg survey called for a 0.1% gain in spending. Forecasts ranged from a 0.1% decrease to a 0.3% advance.

The Bloomberg survey median called for incomes to rise 0.3%, matching the August reading.

A report from the Labor Department showed employment costs rose 0.7% in the third quarter, more than forecast and matching the increase in the previous three months. The gain was paced by a 0.8% advance in wages and salaries that was the biggest since the second quarter of 2008.

The consumption data showed that after adjusting consumer spending for inflation, which generates the figures used to calculate gross domestic product, purchases dropped 0.2% last month after a 0.5% gain in August.

Spending on durable goods, including automobiles, decreased 1.9% after adjusting for inflation following a 2.3% gain. Purchases of non-durable goods, which include gasoline and clothing, declined 0.3%.

Household outlays on services rose 0.1% after adjusting for inflation. In addition to health care, the category also includes categories such as utilities, tourism, legal help and personal care items. This typically makes it difficult for the government to estimate accurately in the preliminary report.

The report gave the monthly breakdown of the third-quarter data issued Oct. 30. That report showed consumer spending, which accounts for almost 70% of the economy, climbed at a 1.8% pace after growing at a 2.5% rate in the second quarter. The weak reading at the end of the quarter gives consumption little momentum heading into the last three months of the year.

The Oct. 31 report also showed that prices tied to consumer spending rose 1.4% in the year ended September, matching the downwardly revised reading from the prior month. Federal Reserve policy makers aim for increases of 2% a year.

The core price measure, which excludes fuel and food, rose 0.1% in September from the prior month and was up 1.5% from a year ago, today’s report showed. Year-over-year gains have held at that level since May.

Disposable income, or the money left over after taxes, was little changed in September after adjusting for inflation, the weakest performance this year. It rose 0.3% in the prior month and was up 2.5% from September 2013.

The saving rate was 5.6% last month, compared with 5.4% in August.