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Spending tapers off after hot summer

People kept a firmer grasp on their wallets in September after spending freely during the summer, the Commerce Department said Friday.

Consumer spending fell 0.3 percent after rising a revised 1 percent in July and 1.1 percent in August, the department said. It was the largest drop in a year.

Adjusted for inflation, September spending looked even worse, dropping 0.6 percent.

The report came on the heels of Thursday's news that the economy soared 7.2 percent in the third quarter, its best showing since 1984. Consumer spending rose during the quarter at an annualized rate of 6.6 percent.

The difference between the impressive quarter and the weak September reflected the diminishing effect of the tax cuts, economists said. At the end of July and the beginning of August, the government mailed out $13.7-billion in tax credit checks. A drop in the tax withholding rates for paychecks also took effect in July.

According to, economists had been expecting only a 0.1 percent decline in personal spending. Still, there was little alarm at the greater drop.

"It's not surprising, and it's not a major concern," said Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Spending, he said, "is simply trending down to a more normal level."

Accounting for most of the increase in August and decrease in September was one thing: cars. The tax cuts joined with end-of-the-model-year sales "moved the metal," Naroff said.

In August, cars and trucks were purchased at an annualized rate of 18-million, "which is not a realistic standard," he said.

Consumers didn't need the official numbers about the best quarter in nearly two decades to feel happier.

The University of Michigan's index of consumer sentiment, also released Friday, jumped from 87.7 in September to 89.6 in October.

The index, based on nationwide surveys, records people's feelings about their economic well-being.

Last winter the index was below 80, a sharp tumble from the heady heights of 110 it reached at the peak of the last expansion, in early 2000.

Encouraging consumers to keep their wallets closed in September was the fact that they were a little emptier. Disposable personal income fell 1 percent after rising 1 percent in August.

Most economists expect the third quarter's recovery to continue, although at a less spectacular pace.

But they caution that it will have to include a pick-up in hiring. More than 2.7-million jobs disappeared in the last recession.