U.S. incomes rise, but spending stagnates

By Wire services | November 23, 2011 | Last updated on November 23, 2011
3 min read

There’s some positive economic news out of the U.S. this morning, with the Commerce Department reporting incomes rose 0.4% in October, making it the best month since March.

These gains were driven by rising salaries in the private sector.

The report also noted that consumer spending rose a miserly 0.1% in the month—a substantial fall-off from a 0.7% increase in September. The decline in spending was concentrated in nondurable goods, such as food and clothing.

The ‘real’ good news in this report is that disposable income adjusted for inflation was up 0.3%, after being in negative territory for three months in a row,” writes Chris G. Christopher, Jr., senior principal economist, IHS Global Insight. “Overall prices fell in October compared to September, due to falling gasoline prices and a considerable easing of food prices. Consumer spending was still positive, but hardly. However, the income improvement and decline of some prices is a good sign as we head into the holiday season.”

Luckily, the holiday spending spree commences on Friday, as Americans head to the malls the day after Thanksgiving.

“Looking ahead, spending should pick up in the holiday shopping season as consumers find good deals, and some people have a little extra disposable income in their pockets,” Christopher writes. “Since consumer confidence is still depressed, shoppers will be spending, but unfortunately, they will not be very cheerful.”

On the downside, many Americans could see their incomes fall in the new year, unless Congress extends a Social Security tax cut and emergency unemployment benefits. Both expire at the end of this year.

“With the failure of the Super Committee, risks have increased that the payroll tax cut and extended unemployment benefits will expire,” write Barclays Capital analysts Dean Maki and Ajay Rajadhyaksha. “We see an expiration of both short-term stimulus measures as shaving about 1 percentage point off Q1 and about 0.5 percentage point off Q2 growth in 2012.”

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% next year, and economists say the expiration of the two programs could reduce growth by a full percentage point.

Economists predict the annual growth rate will firm up at 3% in the final three months of the year, but modest third-quarter growth is not nearly enough to lower the unemployment rate, which has been stuck near 9% for more than two years.

Also out today, the Labor Department revealed a tiny increase in the number of Americans seeking unemployment benefits. Weekly applications for unemployment aid rose 2,000 to a seasonally adjusted 393,000.

That small increase is not enough to reverse the long-term downtrend, however. The four-week average of applications fell to its lowest level since April, suggesting companies are laying off fewer workers.

Even so, weekly applications would need to stay below 375,000 consistently to push down the unemployment rate significantly. They haven’t been at that level since February.

Wire services