Economy gets mixed batch of news ahead of holidays

Published 3:05 am Friday, November 25, 2011

At the start of the critical holiday shopping season, the economy received a dose of mixed news Wednesday.

Consumers barely increased their spending in October, and businesses pulled back on investment in long-lasting manufactured goods. Still, Americans’ pay rose by the most in seven months, a sign they may spend more in coming weeks.

Some economists were discouraged by the reports, especially after a separate report earlier this month showed Americans spent more on retail goods in October for the fifth straight month.

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Paul Dales, a senior U.S. economist with Capital Economics, said the slower consumer spending growth and decline in business investment suggest economic growth in the October-December quarter could be weaker than first thought. He now expects just 2.5 percent growth, instead of 3 percent.

Consumer spending increased 0.1 percent last month, the Commerce Department said. It was the poorest gain in four months.

Yet people continued to spend more on cars and electronics, analysts noted. Spending on longer-lasting goods rose a solid 0.8 percent. Part of that reflected the introduction of the Apple iPhone 4S last month.

People cut back on non-durable purchases, such as clothing and food. Spending on services, which represent two-thirds of consumer spending, barely grew.  That led many analysts to speculate that consumers might be giving up vacations and eating out less because of the weak economy.

“Today’s report was a good reminder that much of what consumers spend their money is not purchased at the shopping mall, but is rather spent on their homes and on their health,” said James Marple, senior economist at TD Economics. “With services spending making up 65 percent of total consumption expenditures, the poor performance here more than made up for the continued gains in spending on goods.”

Perhaps the best news in the report was that Americans earned more in October after five straight months of paltry pay increases. Income rose 0.4 percent last month, the best showing since March. Private wages and salaries drove the gain.

When subtracting taxes and adjusting for inflation, income rose 0.3 percent in October.

Many Americans chose to save the extra money. The savings rate ticked up to 3.5 percent of after-tax incomes from 3.3 percent in September — the lowest level since December 2007, the month the recession started.

Some economists had predicted consumer spending would slow because Americans spent more over the summer while earning less. Consumer spending is important because it makes up 70 percent of economic activity.

Another concern: businesses cut orders for durable goods in October, the Commerce Department said in a separate report. The 0.7 percent decline was largely because of a big drop in volatile commercial aircraft orders.

Still, spending on so-called core capital goods, which are considered a good proxy for business investment plans, dropped by the most since January. That followed two straight months of gains.

Durable goods are products expected to last at least three years. Orders tend to fluctuate sharply from month to month.

A third report showed the number of Americans seeking unemployment benefits rose slightly last week to a seasonally adjusted 393,000 after two months of steady declines.

The four-week average of applications, which smooths week-to-week fluctuations, fell to its lowest level since April, the Labor Department said. The downward trend suggests companies are laying off fewer workers.

The economy grew at a rate of 2 percent in the July-September quarter. The modest growth is not nearly enough to lower the unemployment rate, which has been stuck near 9 percent for more than two years.

Joel Naroff, chief economist at Naroff Economic Advisors, said it was possible that the weak consumer spending last month could be temporary, given that the trend in service spending had been more positive in recent months.

Naroff said spending should rebound to support economic growth of roughly 3.5 percent in the final three months of the year.

Many Americans could take home less next year if Congress doesn’t extend a Social Security tax cut and emergency unemployment benefits. Both expire at the end of this year.

The Social Security tax cut gave most Americans an extra $1,000 to $2,000 this year. If long-term unemployment benefits expire, roughly 6 million families could lose an average of $300 per week. For some, that’s their only source of income.

Both changes would leave Americans with an estimated $165 billion less to spend. The Federal Reserve expects the economy to grow only 2.7 percent next year, and economists say the expiration of the two programs could reduce growth by a full percentage point.