Sept. 29 (Bloomberg) -- Spending by U.S. consumers was unchanged in August, confounding forecasts of a gain, as households retrenched in the face of rising unemployment and slumping confidence.

No change followed a 0.1 percent rise in July that was smaller than previously estimated, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose over the last 12 months by the most in 13 years.

Consumer spending is faltering as the boost from tax rebates fades and Americans grapple with mounting job losses, declining home-equity wealth and a credit squeeze that in recent weeks has turned into a financial meltdown. Economists surveyed by Bloomberg early this month forecast spending this quarter will be the weakest since 1991.

``There're not a whole lot of positives out there,'' Daniel North, chief economist at Euler Hermes ACI in Owings Mills, Maryland, said in a Bloomberg Television interview. Even ``without all this bailout talk,'' the economy seems ``pretty weak.''

Stocks plunged and Treasury bonds rallied after the House of Representatives rejected the Bush administration's $700 billion financial rescue plan. The Standard & Poor's 500 Index fell 8.8 percent, the most since Oct. 26, 1987, to close at 1106.4. Ten- year Treasuries rose, pushing the yield down to 3.61 percent at 4:31 p.m. in New York, from 3.85 percent late on Sept. 26.

Gain Forecast

Economists forecast spending would rise 0.2 percent, after an originally reported 0.2 percent increase in July, according to the median of 64 estimates in a Bloomberg News survey. Projections ranged from gains of 0.5 percent to a drop of 0.2 percent.

Incomes increased 0.5 percent after a 0.6 percent drop the prior month, today's report showed. The median forecast was a gain of 0.2 percent.

The report also showed inflation is eroding Americans' purchasing power. The price gauge tied to spending patterns climbed 4.5 percent from August 2007, after a 4.6 percent gain in the year ended in July.

The central bankers' preferred gauge of prices, which excludes food and fuel, increased 0.2 percent last month, and was up 2.6 percent from August 2007. The year-over-year gain was the largest since January 1995.

Adjusted for inflation, spending was also unchanged after dropping 0.5 percent in July, which was the biggest decrease since June 2004.

Fed Policy

Concern about slower growth and rising prices led Fed policy makers on Sept. 16 to hold the benchmark interest rate at 2 percent.

``The downside risks to growth and the upside risks to inflation are both of significant concern,'' Fed policy makers said after their meeting. ``Economic growth appears to have slowed recently, partly reflecting a softening of household spending.''

Disposable income, or the money left over after taxes, decreased 0.9 percent after declining 0.8 percent the previous month.

Today's report showed inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, increased 1.6 percent after falling 3.2 percent. Purchases of non-durable goods decreased 0.3 percent and spending on services, which account for almost 60 percent of all outlays, dropped 0.1 percent, the first decline since February.

Auto Sales

Purchases of big-ticket items remain weak. Sales of cars and light trucks over the past three months were the weakest since 1993, according to Bloomberg calculations based on industry data.

``The auto industry is the smallest it's been in years in terms of sales'' and the U.S. economy is ``lackluster,'' General Motor Corp.'s Vice Chairman Bob Lutz said Aug. 28 in Joliet, Illinois. ``Nobody is quite sure when it's going to turn around.''

Consumer spending, the biggest part of the economy rose at a 1.2 percent annual pace in the second quarter, the Commerce Department said last week. The increase was revised down from a preliminary estimate of 1.7 percent, indicating the government's tax rebates didn't boost purchases as much as previously estimated.

Economists surveyed by Bloomberg in the first week of September forecast spending this quarter will be unchanged, the weakest since 1991. Retail sales in August fell for a second consecutive month, and sales excluding autos dropped the most this year, the Commerce Department said Sept. 12.

Economists forecast overall economic growth of 1.2 percent in the July-to-September period, from 2.8 percent in the second quarter, according to the Bloomberg survey.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: September 29, 2008 16:36 EDT