Americans are earning and spending more, companies are shedding fewer workers and hopes are rising for the economy as the holiday shopping season starts.
Still, with businesses spending less on manufactured goods and new-home sales near their lowest level in 47 years, consumers alone might not be able to invigorate the economy and drive down unemployment.
All told, government data released the day before Thanksgiving suggest an improving economic picture. But it is increasingly dependent on the consumer, even with U.S. companies having reported record profits in the July-September quarter.
“Households are spending more, and that may signal they are starting to feel better about economic conditions,” said economist Joel Naroff of Naroff Economic Advisors. “It is the consumer that holds the key to the recovery and it looks like households are starting to turn the lock.”
On Wall Street, the mostly encouraging news on the economy buoyed stocks. The Dow Jones industrial average closed up 150 points.
Many retailers depend on the holiday shopping season to make their year. The November-December shopping season can account for up to 40 percent of retailers’ revenue and profits.
Consumers boosted spending 0.4 percent in October, up from a 0.3 percent increase in September, the Commerce Department reported Wednesday.
Many are benefiting from thicker paychecks. Americans’ incomes rose 0.5 percent in October, pulled up by a 0.6 percent rise in wages and salaries. That was after incomes didn’t grow at all in September.
At the same time, the pace of layoffs is slowing. Initial jobless claims dropped by 34,000 to a seasonally adjusted 407,000 in the week ending Nov. 20, the Labor Department said. Applications have fallen in four of the past six weeks.
Last week’s figure was the lowest since July 2008 and the first time that claims have fallen below 425,000 since then. Economists generally believe that weekly first-time applications for jobless aid would need to drop consistently below 425,000 to signal sustained job gains.
Even with last month’s pickup in spending, consumers are shying away from the type of buying needed to significantly lower the 9.6 percent unemployment rate. And economists expect more modest income gains in the months ahead. That’s why some doubt incomes will grow consistently and keep consumers spending enough to invigorate the economy.
“Households have started to pick up the baton of growth from businesses,” said Paul Dales, U.S. economist at Capital Economics. “Whether or not households will be able to shoulder the burden of growth on their own is another matter.”
Americans have become more frugal, saving 5.7 percent of their disposable income in October, compared with just over 1 percent before the recession hit.
They are also resisting the urge to spend money they don’t have. According to Associated Press-GfK Poll, Americans are more likely to pay off their credit-card balances right away than they were last year, and fewer say they make credit card purchases if they lack enough money at the time.
The poll also found that debt isn’t stressing people as much as it had been, but consumers remain leery about holiday buying binges. Just 9 percent said they plan to spend more this year on holiday purchases than they did a year ago; 37 percent plan to spend less.
“Until we see faster job growth, don’t expect shoppers to go on any spending sprees,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “You will see both Santas and Scrooges.”
ShopperTrak, a research firm that tracks sales and traffic at more than 70,000 outlets, now expects holiday sales to grow 3.2 percent. That’s up from a previous forecast of 2.9 percent. The upgraded forecast would mark a turnaround from the 0.4 percent sales drop in 2009, according to ShopperTrak’s calculations.
Even so, retailers will struggle for a piece of consumers’ wallets. Shoppers will want to stick to lists and focus on bargains, experts predict.
The National Retail Federation, the nation’s retail trade group, expects a 2.3 percent increase in holiday spending. That would fall short of the 10-year historic average of 2.5 percent, according to the retail trade group.
In other reports released Wednesday:
? An inflation index that the Federal Reserve monitors most closely is running at a record low. Prices for goods excluding food and energy rose just 0.9 percent in the 12 months that ended in October, the Commerce Department said. That was down from a 1.2 percent annual gain posted in September.
Even though shoppers welcome low prices, inflation is running at a pace below the Fed’s comfort zone of between 1.5 percent and 2 percent. Fed officials worry that very low inflation could devolve into deflation ? a prolonged drop in the prices of wages, goods and services and in the value of assets like stocks or homes.
? Companies enjoyed their best quarter for profits ever in the July-September period. After-tax profits reached $1.22 trillion ? the best showing, without adjustment for inflation, on records dating to 1947.
? Many businesses, however, are sitting on their cash instead of plowing money into expanded operations or hiring. The latest evidence: Orders to U.S. factories for costly manufactured goods plunged in October by the largest amount in 21 months.
Durable-goods orders dropped 3.3 percent last month, the biggest setback since January 2009, when the country was still mired in a recession.
Of special concern was a 4.5 percent drop in orders for nondefense capital goods, excluding aircraft. This category is viewed as a good proxy for business investment plans. It was the biggest drop since a 5.3 percent fall in July.
Economists said the weakness in durable goods orders partly reflects a pullback from consumers during the spring. Consumer spending flatlined in April and again in June. Generally, it takes around six months for a shift in consumer spending to show up in the durable goods report, said Mark Zandi, chief economist at Moody’s Analytics.
? Sales of new homes fell in October to near a record low and home prices dropped to the lowest point in seven years.
Sales of new single-family homes declined 8.1 percent to a seasonally adjusted annual rate of 283,000 units in October, Commerce said in another report. That was just 2.9 percent above the all-time low of 275,000 units hit in August for government records that go back to 1963.
The median price of a home sold in October dipped to $194,900, the lowest level since October 2003.
AP Economics Writers Christopher Rugaber and Martin Crutsinger and AP Retail Writer Anne D’Innocenzio contributed to this report.
Source: The Associated Press.