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Beaten down, American consumers burrow deeper

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JEANNINE AVERSA | October 31, 2008 12:53 AM EST | AP


WASHINGTON — Beaten down and watching their wealth shrink, Americans are burrowing ever deeper _ cutting back on spending and spelling more trouble for the sinking economy.

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 flurry 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.

A new batch of economic reports out Friday is likely to offer fresh confirmation of the stresses weighing on American consumers. Income growth is expected to barely budge in September, inching up just 0.1 percent, according to economists' estimates. Consumers probably trimmed their spending during the month by 0.3 percent, economists predict.

And, given the weak jobs market, employers aren't expected to be overly generous with compensation to their employees. Workers' wages and benefit costs are expected to rise 0.7 percent during the third quarter, economists are forecasting. If that happens, it would mark the same size increase from the previous quarter.

All in all, the economy as a whole contracted at a 0.3 percent pace in the July-to-September quarter, reflecting a sharp pull-back by consumers. They ratcheted back spending by the largest amount in nearly three decades, the government reported Thursday. Consumers' disposable income took its biggest drop on records dating back to 1947. Retailers are bracing for a grim holiday buying season.

Economists say tougher times are still ahead. Believing consumers are cutting back even more right now, they predict a much larger economic decline _ anywhere from a 1 to 2 percent rate _ during the current October-December period. That would meet a classic definition of a recession _ two straight quarters of shrinking GDP.

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 Writer Jay Lindsay in Boston contributed to this report.