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.
The Commerce Department said consumer spending fell 0.2 percent after a 0.8 percent increase in September. Income growth was flat as wages and salaries dropped 0.2 percent, in part because of work disruptions caused by the storm, which lashed the East Coast in late October.
But even stripping out the $18.2 billion annual rate hit to wages and salaries from the storm, they would have been flat, economists say.
"The disappointing tone in consumer spending underscores the dramatic moderation in economic activity," said Millan Mulraine, a senior economist at TD Securities in New York.
When adjusted for inflation, consumer spending fell 0.3 percent, the first decline since June, after rising 0.4 percent 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 1.4 percent annual pace, which was the slowest in more than a year.
The data prompted economists to cut fourth-quarter GDP growth estimates by as much 0.4 percentage point. Estimates now range between a 1.0 percent and 1.8 percent annual pace. The economy expanded at a 2.7 percent rate in the third quarter.
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.
Growth is being pressured not only by the lingering effects of the storm, but fears a sharp tightening in U.S. fiscal policy could hit the economy hard. Automatic government spending cuts and tax increases could drain $600 billion from the economy early next year unless Congress and the Obama administration agree on a less-severe plan to cut budget deficits.
"Weak fourth-quarter growth only reinforces our view that the economy cannot withstand going over the 'fiscal cliff' without falling into recession," said John Ryding, chief economist at RDQ Economics in New York.
U.S. government debt prices rose modestly on the data, while the dollar fell versus the euro. Stocks on Wall Street were little changed.
The income at the disposal of households after inflation and taxes dipped 0.1 percent 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 3.4 percent from 3.3 percent the prior month.
A 29 cent drop in gasoline prices helped keep inflation contained. A price index for consumer spending nudged up 0.1 percent after rising 0.3 percent in September.
In the 12 months through October, the so-called PCE price index rose 1.7 percent, the largest gain since April, after increasing 1.6 percent in September.
A core measure that strips out food and energy costs gained 0.1 percent last month after a similar rise in September. Over the past 12 months, it was up 1.6 percent.
The Federal Reserve has a 2 percent inflation target and the moderate rise in inflation should offer comfort to the central bank that it can continue its aggressive efforts to spur stronger growth without worrying about sharply rising prices.
(Editing by Andrea Ricci)