Beaten down, American consumers burrow deeper

Beaten down and watching their wealth shrink, Americans are cutting back sharply on their spending, trimming it in September by the largest amount in four years.

The Commerce Department reported Friday that consumer spending dropped by 0.3 percent in September, the biggest setback since June 2004. It followed two months in which spending was flat and left activity for the quarterly falling by the biggest amount in 28 years.

The weakness in consumer spending, which accounts for two-thirds of total economic activity, dragged the overall economy down in the third quarter. The gross domestic product, the broadest measure of economic health, also fell by 0.3 percent in the third quarter, the strongest signal yet that the country has fallen into a recession.

Many economists believe that economic activity will fall even more sharply in the current quarter, meeting the classic definition of a recession as at least two consecutive quarters of declining GDP.

In a separate report, the Labor Department on Friday said the wages and benefits of U.S. workers rose by a moderate 0.7 percent in the third quarter, the same increase as in the previous two quarters. The report provided more evidence that the weak economy is keeping a lid on wage pressures.

One of the biggest problems saddling the country is damage from the housing market's collapse. Mounting foreclosures, falling home prices and soured mortgage investments are taking their toll on both individuals and businesses alike.

Federal Reserve Chairman Ben Bernanke, who is scheduled to speak via satellite Friday at a Berkeley, Calif., conference on the mortgage meltdown, is likely to call on government officials and lawmakers to keep working on ways to provide more relief.

The Bush administration is considering a plan that would help around 3 million struggling homeowners avoid foreclosure by having the government guarantee billions of dollars worth of distressed mortgages. The plan also could include loan modifications that would lower interest rates for a five-year period.

Fallout from the housing meltdown has spurred the worst global credit and financial crisis in more than a half century. To combat the problems, the government has taken a number of bold steps. The Treasury Department is pouring $250 billion into banks in return for partial ownership and the Fed this week started buying mounds of debt from companies. It also slashed interest rates to 1 percent, a level seen only once before in the last half century.

All the grim news comes just days before the nation picks the next president. Either Democrat Barack Obama or Republican John McCain will inherit a deeply troubled economy and a record-high budget deficit that could cramp spending plans.

"I think it's very, very important not to hold out the prospect of silver bullets that will correct these crises," Lawrence Summers, a Treasury secretary in the Clinton administration, said in Boston on Thursday.

"One of the difficulties has been there's been a succession of silver bullets that turned out to be hollow," he said. "So I think one just has to be really careful and sober about recognizing there are very serious risks in the situation ... and that the process of improvement will take time."

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Associated Press Writers Martin Crutsinger and Christopher Rugaber in Washington and Jay Lindsay in Boston contributed to this report.