Personal incomes dropped 0.7% in July

Even that 1 percent GDP forecast could be too high if automakers' efforts to boost lagging sales by offering attractive rebates in coming weeks are unsuccessful because of all the headwinds facing consumers, including higher, tighter lending standards by banks struggling with billions of dollars of losses on bad mortgage loans, he said.

"We think the worst is yet to come for consumers," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, another forecasting firm in Valhalla, N.Y. He predicted that consumer spending will decline in the current quarter. The last time that happened was nearly 17 years ago.

But other economists were not as pessimistic, saying that if gasoline prices continue to fall, consumers could spend more on other items. The price drop that has occurred since gas hit a record at $4.11 per gallon in mid-July has helped to lift spirts. The Reuters/University of Michigan consumer sentiment survey showed confidence posted a better-than-expected reading of 63 in late August, up from a reading of 61.7 earlier in the month.

The Federal Reserve, which cut interest rates aggressively from September to April in an effort to keep the economy from falling into a deep recession, has been on hold since that time. The central bank is caught between concerns over a weak economy and worries about rising inflation.

The 4.5 percent year-over-year rise in the price gauge closely watched by the Fed is likely to heighten its inflation concerns. Even excluding food and energy, this price gauge showed an increase of 2.4 percent over the past 12 months, well above the Fed's 1 percent to 2 percent comfort zone.

Democrats, including presidential nominee Barack Obama, are calling for the government to pass a second stimulus package to guard against the economy slumping into a deep recession.

But President Bush, concerned about the impact the stimulus payments will have on the budget deficit, has resisted those calls, insisting that the rebate payments will continue to support the economy in coming months. The administration is forecasting that the federal budget deficit for the budget year that begins on Oct. 1 will soar to an all-time high in dollar terms of $482 billion.