By Shobhana Chandra Oct. 31 (Bloomberg) -- Spending by U.S. consumers dropped more than forecast in September, capping the weakest quarter in three decades and indicating the economic slump is deepening. The 0.3 percent decrease in purchases was the biggest in four years and followed no change in August and July, the Commerce Department said today in Washington. The report also showed that the Federal Reserve's preferred measure of inflation cooled last month. ``Consumers have thrown in the towel,'' said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, who correctly forecast the drop in spending. ``They have no choice but to cut back on spending in a very big way. This is going to be a fairly deep, long recession.'' Job losses, increases in food and fuel costs and falling property values brought an end to the longest expansion in spending on record and made the economy the most important issue in next week's presidential election. The collapse in lending and sentiment this month indicate Americans will keep retrenching. Waning inflation concerns mean the Fed has ``more room to maneuver'' with interest rates, Behravesh said. San Francisco Fed President Janet Yellen said yesterday that the central bank may cut the benchmark rate close to zero percent from the current 1 percent level should the economy remain weak. Employment Costs A Labor Department report today showed that employment costs rose 0.7 percent in July to September, the same pace as the previous two quarters. That's a sign that rising unemployment is stifling gains in wages and benefits. Treasuries added to earlier gains after the report and stock-index futures dropped. Futures on the Standard & Poor's 500 Stock Index declined 1.2 percent to 949.60 at 8:50 a.m. in New York. Benchmark 10-year note yields fell to 3.85 percent, from 3.96 percent late yesterday. Economists forecast spending would fall 0.2 percent, after a previously estimated no change in August, according to the median of 73 projections in a Bloomberg News survey. Estimates ranged from a 0.3 percent gain to a 1 percent drop. Incomes rose 0.2 percent, after a 0.4 percent gain the prior month. The slowdown reflected uninsured losses from the Gulf Coast hurricanes and smaller gains in wages as the job losses climbed. Fed Warning The Fed this week warned of further ``downside risks'' to growth even after cutting interest rates twice in October and injecting billions of dollars to unclog credit. Policy makers on Oct. 29 reduced the benchmark rate by a half percentage point to 1 percent, matching a half-century low. They also forecast inflation will moderate. Today's report also showed inflation started to cool at the end of the third quarter as the economy stumbled. The price gauge tied to spending patterns rose 4.2 percent from September 2007, down from a 4.5 percent increase in the 12 months ended in August. The Fed's preferred gauge of prices, which excludes food and fuel, increased 0.2 percent for a second month. The core-price measure was up 2.4 percent from September 2007, after a year-over-year increase of 2.5 percent in August. Adjusted for inflation, spending dropped 0.4 percent after being unchanged the prior month. Because spending dropped, the savings rate improved to 1.3 percent from 0.8 percent the prior month. Less Spending Today's report showed inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 2.9 percent. Purchases of non-durable goods decreased 0.8 percent and spending on services, which account for almost 60 percent of all outlays, climbed 0.2 percent. The economy contracted at a 0.3 percent annual pace last quarter, Commerce reported yesterday. Consumer spending fell at a 3.1 percent rate, the first drop since 1991 and the biggest since 1980, after President Jimmy Carter imposed credit controls. Households cut spending on non-durable goods, like clothing and food, last quarter by the most since 1950, and slashed purchases of durable goods by the most since 1987, the GDP report showed. The flagging economy is the main reason Democratic presidential candidate Barack Obama, an Illinois senator, is ahead of Republican rival Senator John McCain of Arizona in most polls. On the question of which candidate they trust most on the economy, voters in Florida picked Obama over McCain by a 9-point margin, and in Ohio, the Democrat leads by 12 points, according to a Bloomberg/Los Angeles Times poll issued this week. American Express Co., the largest U.S. credit-card company by purchases, said yesterday it'll slash 7,000 jobs as consumers spend less and defaults rise. Cardholders failed to repay loans in the third quarter at almost twice the rate of a year earlier, and the company set aside $1.4 billion for loan losses. The job cuts ``will help us to manage through one of the most challenging economic environments we've seen in many decades,'' Chief Executive Officer Kenneth Chenault said in a statement. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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