Americans Boost Spending As Incomes Grow

November 24, 2010 - 10:31 AM

Washington (AP) - Americans earned more and spent more last month, a hopeful sign for the economy ahead of the holiday buying season.

Consumers boosted their spending 0.4 percent in October, the Commerce Department said Wednesday. That was up from a 0.3 percent increase in September.

People showed a slightly bigger appetite to spend because their incomes rose 0.5 percent, reflecting a slowly healing jobs market. Incomes didn't grow at all the month before. The increases in both income and spending last month were the most since August.

Even with the pickup, consumers are still shying away from the type of spending needed to dramatically lower the 9.6 unemployment rate.

Normally after a recession, consumers spend more freely. But more than one year after the recession ended, Americans are more focused on getting their personal finances in order. They are paring down debt, watching their spending and building savings.

Americans saved 5.7 percent of their disposable income in October. That was up from 5.6 percent in September and was the most since August. Before the recession, they were saving just over 1 percent.

Federal Reserve Chairman Ben Bernanke and other economists worry that high unemployment, hard-to-get-credit, weak home values and lackluster wage growth are forces that will restrain the growth in consumer spending.

To counter that and try to invigorate the economy, the Fed recently launched a $600 billion program to buy government bonds. By doing so, the Fed hopes to boost stock prices and make loans cheaper, positive developments that could make people want to spend more.

Even faced with all the negative forces, Americans are still buying. That's important because their spending accounts for roughly 70 percent of all economic output. With consumers holding up, fears the economy could slip back into a recession have receded.

In the July-September quarter, consumer spending grew at a 2.8 percent pace, the most in nearly four years.

Leading economists in an AP Economy Survey predict consumer spending will grow at a 2.4 percent pace in the October-December quarter. Consumer spending would need to grow by at least twice that pace to translate into the type of robust economic growth to make a big dent in the nation's unemployment rate.

The nation's unemployment rate has been stuck at 9.6 percent unemployment rate for the past three months. New projections from Federal Reserve suggest that won't change much for a few years.

A gauge linked to Wednesday's income and spending reported showed that inflation is running lower.

Prices for goods excluding food and energy rose just 0.9 percent in the 12 months ending in October. That was down from a 1.2 percent annual gain posted in September. Inflation is running at a pace below the Fed's comfort zone of between 1.5 percent and 2 percent.

The Fed's new economic aid program also is aimed at making sure that very low inflation doesn't turn into deflation. Deflation is a dangerous and prolonged drop in prices, wages and in the values of homes and stocks.