Consumer spending increases 0.3%

Sales of vehicles, clothing propel October numbers despite flat wages

WASHINGTON - U.S. consumers increased their spending in October even though their wages and salaries barely rose, raising questions about how strong the economy will grow at the end of the year.

Consumer spending increased 0.3 percent in October compared with September, when spending rose 0.2 percent, the Commerce Department reported Friday. Wages and salaries rose a slight 0.1 percent after a much stronger 1 percent rise in September.

“People are feeling better; that’s a positive for the holiday season,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “This year, I don’t see the same strong fiscal headwinds ahead of us to impede our momentum.”

Overall income actually fell 0.1 percent after a 0.5 percent rise in September. But September’s gain was inflated bya legal settlement that boosted farm income that month, leading to a big decline in farm income in October.

The personal savings rate dipped to 4.8 percent of after-tax income in October, down from 5.2 percent in September, reflecting the difference between spending and income.

The rise in spending reflected gains in purchases of long-lasting manufactured goods such as autos and gains in spending on nondurable goods such as clothing and services such as rent and utilities. It meant a solid increasefor the first month of the current quarter.

Consumer spending is closely watched because it accounts for 70 percent of economic activity.

The economy grew at a 3.6 percent annual rate from July through September, the fastest since early 2012, but nearly half the growth came from a buildup in business stockpiles, a trend that could reverse in the current quarter and hold back growth. Excluding inventories, the economy grew at a 1.9 percent rate in the third quarter, down from 2.1 percent in the spring. That’s in line with the rate that the economy has seen since the recessionended four years ago.

Many economists believe overall economic growth will dip below 2 percent in the current October-December quarter, in part because a slowdown in inventory-building will act as a drag on activity.

But there have been some signs of strength, including a separate report Friday showing that the unemployment rate dropped to a five-year low of 7 percent in November as the economy created 203,000 jobs.

In the third quarter, consumers increased their spending at a 1.4 percent annual rate. That was the slowest since the final quarter of2009, a few months after the recession officially ended. But spending activity in the third quarter was held back by flat spending on services. That may have reflected an unusually mild summer, which cut demand for air conditioning. One hopeful sign is that consumers spent on goods at the fastest rate since early 2012.

An inflation gauge closely watched by the Federal Reserve showed prices were flat in October and have risen just 0.7 percent over the past 12 months, well below the Fed’s 2 percent target for inflation.

Information for this article was contributed by Lorraine Woellert of Bloomberg News.

Business, Pages 7 on 12/07/2013

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