NEW YORK (CNN/Money) -
Hurricanes can bury a lot of things, but don't let them bury a very important nugget in Monday's personal income and spending report: the consumer fell off a spending cliff in August and September!
On the surface, the spending numbers look fine.
Personal spending rose 0.5 percent last month, but when the effect of soaring oil and gas prices is removed to get a "real" view of spending instead of a "nominal" reading, then the number looks pretty anemic: real spending fell 0.4 percent in September after falling by 1 percent in August.
And, given that consumer spending is about two-thirds of the economy, and given the way the government's economic math works, the economy's growth rate could actually turn negative in the fourth quarter if the consumer doesn't perk up quickly.
"Coming on the heels of a 1 percent drop in August, the two-month decline was the biggest in nearly 19 years and leaves the spending level at quarter-end well below the Q3 average," economist Dave Resler at Nomura Securities wrote in a report Monday.
"For spending to match the third-quarter level -- thereby avoiding a decline -- real spending must grow at a 3.6 percent annual rate (about 0.3 percent each month). With car sales reportedly quite weak in October, this could prove to be a rather tall order."
Now, it's true that falling auto sales had a lot to do with this. Spending on durable goods (remember? Big-ticket items built to last three years or more?) fell by 2.4 percent in September after plunging 8.9 percent in August, according to the Bureau of Economic Analysis, the economics arm of the Commerce Department. (Full story.)
Problem is that the early read from a lot of auto dealers this month has been another month of crummy sales. (Full story.) So there could more of this kind of weakness in the pipeline.
What about spending on other stuff you say? Certainly people buy a lot more than cars. Yes they do and unfortunately, when you adjust again for inflation, mainly boosted by energy prices right now, you see that it's not just autos that consumers are shying away from.
Purchases of "non-durable" goods -- less durable items like clothing, books, DVDs, etc. -- fell by 1 percent in September after rising a mere 0.1 percent in August.
Only spending on services was growing, and that's the category that includes visits to the doctor's office, lawyers' fees, financial services, etc.: up 0.3 percent in September on top of an increase of 0.2 percent the month before.
Nomura's Resler says if the consumer fails to shift back into a higher spending gear, the Fed will take note, if not tomorrow, then surely in December at its final meeting of the year.
"Unless spending (primarily ex-autos) stages a rather convincing recovery in the next few weeks, the prospect of the first quarterly decline in consumer spending in 15 years could factor into the December 13 FOMC decision," Resler wrote, referring to the Federal Open Market Committee, the Fed's policy-making arm.
According to some economists, it all depends on the job market.
"Consumer spending is unlikely to slow by enough to materially harm the overall economy, if, as expected, the unemployment rate resumes its downward trend in 2006," is the view of Jon Lonski of Moody's Investor's Service.
A possible assist for the consumer could be shaping up in the steady drop in gas prices at the pump as the impact of the hurricanes pass and as crude oil prices fall back near $60 a barrel. (Full story.)
The problem is, in the view of Dave Gilmore of FXA up in Connecticut, that the Fed is raising interest rates, bond yields are rising finally as a result, and if energy prices keep falling and give the consumer some relief -- and the economy a bounce -- that could encourage even more rate hikes.
"Yes, the U.S. consumer is quite vulnerable to rising market rates...the home ATM machine gets gummed up if rising mortgage rates lead to a correction in the U.S. housing market," he said.
Remember, the Fed has been raising short-term rates since June of 2004 but the long-term, bond-market rates that determine mortgage rates have stayed relatively low -- until the Fed's last rate hike in September.
"If bond yields keep rising which I think they will, then not even stocks are safe from a welcome decline in energy prices," observes Gilmore. "In this case lower energy prices could prove to be a Trojan horse unleashing a problematic rise in market rates."
Kathleen Hays is economics correspondent for CNN. Click here for more of her columns.
Consumer sentiment is falling -- click here.