The Commerce Department said Friday that consumer spending dropped 0.2 per cent in October. That's down from an increase of 0.8 per cent in September and the weakest showing since May.
Income was flat in the month following a 0.4 per cent rise in September.
The government said work interruptions caused by the storm reduced wages and salaries by about $18 billion at an annual rate. The storm affected 24 states, with the most severe damage in New York and New Jersey.
Consumers may also be scaling back on spending because they are worried about the "fiscal cliff." That's the name for automatic tax increases and spending cuts that will take effect in January if Congress and the Obama administration fail to strike a deal before then.
"The upshot is that although both incomes and spending will probably bounce back in November, the underlying trend is weak," said Paul Dales, senior U.S. economist at Capital Economics.
The depressed spending figures suggest the economy will grow more slowly in the October-December quarter. Consumer spending drives nearly 70 per cent of economic activity.
Dales predicts growth will tumble from the 2.7 per cent annual rate in the July-September quarter to a weak 1 per cent in the October-December period. That's considered too low to lower the unemployment rate.
Even discounting the effects of Sandy, income growth would have risen a still-weak 0.1 per cent. After-tax income adjusted for inflation fell 0.1 per cent. And spending adjusted for inflation dropped 0.3 per cent — the biggest decline in three years.
The saving rate edged up slightly to 3.4 per cent of after-tax income in October, compared with 3.3 per cent in September.
Many economists predict economic growth will rebound in the New Year when the rebuilding phase begins in the Northeast.
And if President Barack Obama and Congress can reach a budget deal to avoid to fiscal cliff, some analysts and Federal Reserve Chairman Ben Bernanke are predicting a good year for the economy.
Still, the storm's impact has slowed sales in the nation's most densely populated region ahead of the crucial holiday shopping season.
The International Council of Shopping Centers said 18 major retailers reported sales rose 1.7 per cent in November compared to the same period a year ago. The group had been expecting sales growth between 4.5 per cent and 5.5 per cent.
The impact of the storm may be starting to fade. Retailers are reporting solid sales over the Thanksgiving Day holiday weekend.
And applications for unemployment benefits have fallen from an 18-month high in the first week of November. The surge was driven by applications in New York, New Jersey, Pennsylvania and Connecticut.
Still, the increase in unemployment claims earlier this month will likely depress job growth for November. Many economists predict that net job growth for November will range between 25,000 and 75,000 — well below the 171,000 jobs added in October.Suggest a correction