Nov. 1 (Bloomberg) -- Consumer spending in the U.S. rose less than forecast in September as house prices fell and fuel expenses climbed.

The 0.3 percent increase followed a revised 0.5 percent gain in August that was smaller than previously reported, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose 1.8 percent from a year ago, matching economists' estimates.

The figures back the Fed's warning that the economic expansion will likely cool from the third quarter's annual rate of 3.9 percent. The spending slowdown may also signal weaker holiday sales for American retailers.

``With oil prices going up and gasoline prices likely to follow, there will be less room for real consumer spending growth in the fourth quarter,'' said Avery Shenfeld, a senior economist at CIBC World Markets Inc. in Toronto, who accurately predicted the spending increase. ``The slowdown could be quite sharp.''

Economists anticipated spending would increase 0.4 percent, after an originally reported 0.6 percent gain for August, according to the median of 80 projections in a Bloomberg News survey.

The third-quarter growth figures, published by the Commerce Department yesterday, showed consumer purchases rose 3 percent, without saying whether it was gaining or losing momentum.

``Spending is going to slow as we get into the fourth quarter,'' said Michael Carey, chief economist for North America at Calyon Corp. in New York. ``Consumers may be a bit cautious.''

ISM Report

Manufacturing in the U.S. slowed more than forecast in October as factories received fewer orders and production contracted, an industry report showed today. The Institute for Supply Management's factory index fell to 50.9, the lowest in seven months, from 52 in September. Readings greater than 50 signal expansion.

The number of Americans filing first-time claims for unemployment benefits last week remained at a level that economists say points to a softening labor market, a report by the Labor Department showed. Initial jobless claims fell by 6,000 to 327,000 in the week that ended Oct. 27, exceeding this year's average of 318,000 for three consecutive weeks.

U.S. Treasury securities extended gains following the reports, and the dollar remained higher against the euro. Stocks fell after analysts downgraded Citigroup Inc.]

Incomes Rise

The spending report showed incomes increased 0.4 percent in September for a second month, today's report showed. The gain matched the median forecast of economists surveyed.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.2 percent in September after a 0.1 percent gain the previous month. It was up 1.8 percent from September 2006, matching the August increase as the smallest since early 2004.

Fed policy makers yesterday cut the benchmark overnight lending rate between banks for a second time in as many months and signaled they were reluctant to lower borrowing costs again pending evidence the economic slowdown was intensifying.

The action, ``combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the Federal Open Market Committee said in a statement after meeting yesterday in Washington. ``After this action, the upside risks to inflation roughly balance the downside risks to growth.''

Inflation Adjusted

The central bank also said higher energy and commodity prices posed a risk of aggravating inflation.

Adjusted for prices, spending rose 0.1 percent in September, the smallest gain since June, after a 0.6 percent increase the prior month, the report showed.

Because the increase in spending was smaller than the gain in incomes, the savings rate rose to 0.9 percent, from 0.8 percent in August.

Disposable income, or money left over after taxes, increased 0.4 percent after a 0.5 percent gain.

Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, rose 0.4 percent and purchases of non-durable goods increased 0.3 percent. Spending on services, which includes utilities and accounts for almost 60 percent of all outlays, dropped 0.1 percent, the first decline since May.

Consumer `Slowdown'

Economists expect consumer spending to slow this quarter as hiring softens and house prices continue to fall.

``The expectations of a consumer-led slowdown really kick in toward the Christmas season,'' John Shin, a senior economist at Lehman Brothers Holdings Inc. in New York, said before the report.

Spending grew at a 3 percent annual rate last quarter, helping economic growth accelerate, the government said yesterday. Purchases probably will grow at a 2.1 percent annual rate this quarter, economists surveyed by Bloomberg News said last month.

The International Council of Shopping Centers and UBS Securities LLC last week reduced their October chain-store sales forecast after some merchants were forced to drop prices to attract customers.

The group now estimates sales rose 2 percent, down from a prior forecast of 2.5 percent. Target Corp. last week lowered its October sales forecast and Wal-Mart Stores Inc., the world's largest retailer, cut prices on 15,000 items for the holidays.

Jobs Report

One development concerning economists is a slowdown in hiring. The Labor Department is scheduled to release its October jobs report tomorrow at 8:30 a.m. in Washington. Economists surveyed by Bloomberg News forecast the U.S. added 81,000 positions last month, the fewest in four months.

``There is more pressure on lower-income consumers than there is on middle- and upper-income consumers,'' Procter & Gamble Co. Chief Executive Officer A.G. Lafley told analysts on a conference call Oct. 30.

Procter & Gamble, the largest U.S. consumer-goods maker, forecast full-year profit that trailed analysts' estimates because of slowing U.S. consumer spending and higher commodity expenses.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: November 1, 2007 10:14 EDT