US consumer spending dropped 1.0 percent in October, the steepest fall since September 2001, government data showed Wednesday in a further sign of the credit crunch hitting economic activity.
The Commerce Department report showed the sharp drop in spending came even as incomes rose 0.3 percent in the month.
Private economists had expected a rise in incomes of 0.1 percent and drop in spending of 0.7 percent.
The report showed a dismal beginning of the fourth quarter for the US economy, which relies on consumer spending for around two-thirds of economic activity.
Ian Shepherdson, economist at High Frequency Economics, called the report "horrible" and said much of the drop was linked to weak auto sales.
But because of falling prices -- an inflation index linked to the report showed a 0.6 percent decline -- Shepherdson said "the fall in real spending was 0.6 percent after rounding, not quite as massive as the nominal plunge."
Two other reports were equally grim.
The Commerce Department said orders for big-ticket durable goods fell a whopping 6.2 percent in October, a further bad sign for manufacturing.
The drop in durable goods -- such as planes, automobiles and refrigerators -- was sharper than the 2.5 percent decline expected on Wall Street.
A separate report said new claims for unemployment benefits rose to a fresh 16-year high. Claims in the week to November 22 increased by 14,000 to 529,000, a sign that employers as well as consumers are retrenching from the financial and economic storm.
Taken together, the reports paint a picture of an economy sinking deep into recession, said Marisa DiNatale at Economy.com.
"Availability of credit continues to be a major detriment to both consumer and business spending and investment and consumption cannot bounce back until credit starts flowing again," she said.
"Once the credit markets open up again, business investment is likely to bounce back quickly, helping to get the economy back on its feet. Given the state of the housing market and the job market, consumers will likely not be the ones to pull the economy out of recession."