Oct. 30 (Bloomberg) -- Americans cut spending for the first time in five months and a gauge of confidence weakened, signaling consumers will make a limited contribution to the recovery without government incentives.

Consumer spending fell 0.5 percent in September after a 1.4 percent jump in August, Commerce Department figures showed today in Washington. The Reuters/University of Michigan final index of consumer sentiment decreased to 70.6 in October from 73.5 the month before.

Mounting jobs losses, stagnant incomes and the expiration of programs such as the cash-for-clunkers auto rebates threaten to hold back household spending as the nation emerges from a recession. An unexpected improvement in an index of business activity reported separately today supports forecasts that manufacturing may help fill the void and propel the expansion that started last quarter.

“Manufacturing growth is going to be robust and broad- based,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Consumers are waiting to see whether the job market will improve before confidence takes another big leg up. That’s coming, but it’ll be a gradual process.”

Stocks plunged after the consumer spending report, with the Standard & Poor’s 500 Index falling 2.8 percent, the most since July 2, to close at 1,036.19. Treasury securities rose, pushing the yield on the 10-year note down to 3.39 percent from 3.50 percent late yesterday.

Business Barometer

The Institute for Supply Management-Chicago Inc. said its business barometer increased to 54.2, the highest level in 13 months. The gauge was forecast to rise to 49, the median estimate of 58 economists in a Bloomberg News survey. Readings above 50 signal an expansion.

The drop in consumer spending matched the estimate in a Bloomberg survey of 75 economists. The University of Michigan index was forecast to fall to 70 in a Bloomberg survey of 60 economists.

Employment expenses rose 0.4 percent in the third quarter and wages had the smallest 12-month gain since 1982, figures from the Labor Department also showed today. The increase in the employment-cost index was the same as the gain in the second quarter and followed a 0.3 percent increase in the first quarter was the smallest since records began in 1996.

Wages and salaries dropped 0.2 percent after a 0.2 percent gain the prior month, the Commerce Department report showed. The report also indicated that inflation isn’t a threat, giving Federal Reserve policy makers more reason to repeat their promise to keep interest rates low for an “extended period” when they meet next week.

Price Measure

The Fed’s preferred price measure, which excludes food and fuel, climbed 0.1 percent from the previous month and was up 1.3 percent from a year earlier, matching the 12-month gain in August that was the smallest since 2001.

The decrease in spending pushed the savings rate up to 3.3 percent last month from 2.8 percent.

Disposable income, or the money left over after taxes, was unchanged after rising 0.1 percent the previous month. Adjusted for inflation, disposable income dropped 0.1 percent.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 7.2 percent last month after increasing 6.7 percent in the prior month.

Kellogg Co., the largest U.S. breakfast-cereal maker, yesterday reported third-quarter profit that exceeded analysts’ estimates as costs fell more than sales.

‘Value Conscious’

“Consumers remain nervous and are more value conscious than they were a couple of years ago,” Chief Executive Officer David Mackay said in a telephone interview. “We have to be pragmatic about consumers and the issues and pressures they face, and try to help them in any way we can.”

The unemployment rate reached a 26-year high of 9.8 percent in September, up from 7.6 percent from when President Barack Obama took office in January. Economists project the jobless rate will exceed 10 percent by early 2010.

Since the recession began in December 2007, the U.S. has lost 7.2 million jobs. Payroll cuts peaked at 741,000 in January before falling to 263,000 job losses in September.

The economy grew in the third quarter for the first time in more than a year, propelled by emergency programs to boost buying of cars and homes, according to Commerce Department figures released yesterday. Gross domestic product expanded at a 3.5 percent annual pace.

Inventories

The report also showed that companies are slowing the pace of inventory reductions, paving the way for increases in production to meet demand fueled by more than $2 trillion in global government stimulus programs.

Businesses seeing steadier demand include Caterpillar Inc., the world’s largest maker of bulldozers and excavators, which issued a full-year profit forecast exceeding the highest prediction from analysts.

“We are seeing encouraging signs that indicate a recovery may be under way,” Jim Owens, chief executive officer of the Peoria, Illinois-based company, said in a statement on Oct. 20. “We’ve already started planning for an upturn.”

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: October 30, 2009 16:56 EDT