Job growth is lifting hopes for consumer spending
WASHINGTON (AP) — Consumer spending and incomes barely rose last month. Business investment has slowed. New-home sales remain dismal.
Despite all that, some economists say a brightening job market is lifting their hopes for 2012. More aggressive hiring, the thinking goes, would fuel enough spending to boost the economy.
Economists point to a big drop reported this week in applications for unemployment benefits, the third straight decline. Applications are now at their lowest level since April 2008. The trend is signaling that layoffs have all but stalled and that employers may be ready to step up hiring.
Unemployment, after hovering around 9 percent for more than two years, dropped in November to 8.6 percent. Employers have added at least 100,000 jobs each month from July through November. It's the best such streak since 2006.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he expects the economy to grow at a 2.5 percent annual rate in the current October-December quarter. That would be the best performance in a year.
More jobs would mean more income. More pay tends to raise consumer spending, which makes up about 70 percent of the economy. Companies then have reason to increase hiring to meet stronger demand.
"We are hopeful that the plunge in jobless claims signals exactly that," Shepherdson said in a research note Friday.
Chris G. Christopher Jr., senior economist at IHS Global Insight, noted that many households are still struggling with slight or no pay increases.
"But gasoline prices have been falling, and that is giving them more money to spend on other items," he said.
The government said Friday that consumer spending rose just 0.1 percent in November, matching the increase in October. Incomes also rose a scant 0.1 percent.
Modest as they were, economists said the figures at least signaled that incomes and spending aren't stalling.
Healthier economic data in recent weeks have helped make the prospect of another U.S. recession seem more remote — as long as Europe's debt crisis doesn't trigger a catastrophe that infects the global economy.
Some economists trimmed their forecasts for growth based on the weaker-than-expected consumer spending data for November. But they said they still expected the economy to expand at a solid annual rate of 3 percent in the current October-December quarter. It would be the best showing since the spring of 2010.
"We are seeing some momentum going into the new year," said Stuart Hoffman, chief economist at PNC Financial. "At least we are not in a tight spot where we are still worried about relapsing into recession."
Hoffman said that a major source of uncertainty for 2012 was removed this week with Congress' agreement to extend a Social Security tax cut for 160 million workers — for two months, anyway.
As part of the deal, Congress also renewed benefits for the long-term unemployed. If that hadn't happened, millions of unemployed people would have begun to lose weekly checks averaging about $300 — the main source of income for most of them.
And if the payroll tax cut and the long-term unemployment benefits hadn't been renewed for 2012, economists said the modest growth of around 2.5 percent they expect next year would have been a full percentage point lower.
On Friday, the government also released a cautionary report on U.S. manufacturing. Companies' demand for long-lasting manufactured goods rose by the most in four months in November. But so-called core capital goods, a gauge of business investment spending, dropped for a second straight month.
Still, analysts said that with demand for items such as autos still strong, they expect further gains in factory orders and production.
In a third report, sales of new homes rose 1.6 percent in November to a seasonally adjusted annual rate of 315,000. Even with that small gain, 2011 is likely to end up as the worst year for new-home sales on records dating to 1963.
More significant for the economy was Friday's report on incomes and spending in November. The scant income gain reflected a decline in wages and salaries. They are the biggest component of incomes.
The sluggish rise in spending was held back by a 0.3 percent drop in spending on non-durable goods such as food, clothing and gasoline. Spending on durable goods rose 0.8 percent. The gain reflected solid auto sales in November.
Spending on services rose a modest 0.1 percent. This category includes such items as medical treatments and rent, The consumer spending report covers all items that households buy, including services, which make up about two-thirds of spending.
After-tax incomes showed no growth in November. The savings rate dipped to 3.5 percent of after-tax incomes, the lowest rate since late 2007. That shows consumers are having to tap their savings to finance their spending because of the weak income growth.
The best antidote for that would be an increase in hiring now that fewer people are being laid off.
"The jobless claims data point to stronger jobs growth emerging," said John Ryding, an economist at RDQ Economics.
AP Economics Writer Derek Kravitz contributed to this report.