Consumer Spending Comes Roaring Back, Outpacing Incomes

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The New York Sun

WASHINGTON – Consumers, who substantially slowed down their spending in late summer, roared back to life in September, boosting their purchases by 0.6%.The gain in spending reported yesterday by the government far outpaced the increase in incomes.


The Commerce Department attributed the spending surge to a big jump in purchases of big-ticket products such as cars, reflecting the fact that auto dealers brought back popular sales incentives.


The 0.6% rise in consumer spending followed an outright decline of 0.1% in August, which had followed a 1.2% July increase. Consumer spending is closely watched since it accounts for two-thirds of total economic activity.


Income growth was a far more moderate 0.2% in September following a 0.3% rise in August, which had been the biggest income increase since a 0.5% rise in May.


In other economic news, the Commerce Department reported that construction spending was essentially flat in September after big gains of 0.9% in August and July.


The sharp slowdown reflected a 0.2% drop in residential construction, the first decline in this category since February 2003. Residential building activity, which still totaled $560 billion at an annual rate, has been red-hot in recent years, reflecting the lowest mortgages rates in four decades.


Nonresidential building activity posted a 0.3% increase in September, coming in at an annual rate of $453.9 billion, reflecting strength in hotel and motel construction, schools and churches.


Private construction was down 0.1% in September, the first decline since January, to an annual rate of $777.5 billion, but this weakness was offset by a 0.3% rise in government construction activity which rose to $236.4 billion. The strength in government activity reflected a 3% jump in office construction, which helped offset a 1.5% drop in highway construction.


In a third report, a key index of factory health showed manufacturing activity expanded in October for a 17th straight month although the figure for last month was lower than had been expected.


The Institute of Supply Management said that its closely watched gauge of manufacturing activity posted a reading of 56.8 in October, down from 58.5 in September. A reading above 50 indicates that the manufacturing sector of the economy is continuing to expand.


The government reported on Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 3.7% in the July-September quarter, up from a 3.3% rate of GDP growth in the April-June quarter.


That rebound reflected a bounce in consumer spending to an annual rate of 4.6%, far ahead of the anemic 1.6% rate in the second quarter.


While an improvement over the second quarter, the 3.7% GDP growth in the third quarter was still below economists’ predictions that the economy was expanding at a 4.3% annual rate in the summer.


The economy has been a major debating point in the presidential election with President Bush contending that his large tax cuts have helped to jump-start growth following the 2001 recession. Challenger John Kerry contends the tax cuts went primarily to the wealthy and helped to produce record budget deficits.


The Commerce Department reported that purchases of durable goods, the category that includes autos, rose by 1.6% in September after having fallen by 2% in August.


Americans’ after-tax incomes rose by a tiny 0.1% in September following a 0.2% advance in August.


With spending rising three times as fast as after-tax incomes, Americans’ savings rate dropped to 0.2% in September, down from 0.7% in September. It was the lowest level for the savings rate since it dropped to an all-time low of minus 0.2% in October 2001.


Economists are concerned that if incomes do not rebound, Americans will be forced to cut back on spending at some point, given that the savings rate is at such a low level.


Income growth has lagged in part because job growth has been disappointing in recent months.


While the unemployment rate stayed at 5.4% in September, the economy created just 96,000 jobs, far below the 150,000 jobs analysts had been expecting.


Businesses have grown cautious about hiring new workers out of concern that the big jump in energy prices will slow economic activity in the months ahead.


The New York Sun

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