WASHINGTON (Reuters) - U.S. consumers cut spending in September and turned gloomier this month, underscoring the fragility of the economy's recovery even as signs emerged that manufacturing may be picking up.
The Commerce Department said on Friday consumer spending fell 0.5 percent last month, the largest drop since December, after a 1.4 percent increase in August. The decline, which was in line with market expectations, followed the end of a government incentive program to boost auto sales.
A separate report showed factory activity in the nation's Midwest expanding for the first time in more than a year, but employment conditions deteriorated. A dismal job market appeared to weigh on consumers, with the Reuters/University of Michigan final index of sentiment for October slipping to 70.6 from 73.5 last month.
The mixed data sent stocks tumbling, a day after recording their biggest gains in three months. Government bond prices and the U.S. dollar rose, attracting safe-haven flows.
"The irony is consumers are still in a funk even though monthly job losses are shrinking. The economy is in a recovery mode, but it will be a soggy recovery, unless the consumer starts to feel better and spend more," said Cary Leahey, an economist at Decision Economics in New York.
U.S. Federal Reserve policymakers, who meet on Tuesday and Wednesday, are expected to keep their support for the economy in place for some time given labor market slack and muted inflation pressures. The Fed -- the U.S. central bank -- cut overnight interest rates close to zero in December and has held them there ever since.
Government data on Thursday showed the economy grew at a 3.5 percent annual rate in the third quarter, probably ending a recession that began in December 2007.
Much of the expansion was driven by a sharp turnaround in consumer spending, which normally accounts for more than two-thirds of U.S. economic activity.