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Consumer spending weak, economy news mixed as holiday shopping season arrives

WASHINGTON — At the start of the critical holiday shopping season, the economy received a dose of mixed news Wednesday.

Consumers barely increased their spending in October, and businesses pulled back on investment in long-lasting manufactured goods. Still, Americans' pay rose by the most in seven months, a sign that they may spend more in coming weeks.

Some economists were discouraged by the reports, especially after a separate report this month showed Americans spent more on retail goods in October for the fifth straight month.

Paul Dales, a senior U.S. economist with Capital Economics, said the slower consumer spending growth and decline in business investment suggest economic growth in the October-December quarter could be weaker than first thought. He now expects just 2.5 percent growth, instead of 3 percent.

Consumer spending increased 0.1 percent last month, the Commerce Department said, the poorest gain in four months.

Yet people continued to spend more on cars and electronics, analysts noted. Spending on longer-lasting goods rose a solid 0.8 percent. Part of that reflected the introduction of the Apple iPhone 4S last month.

People cut back on nondurable purchases, such as clothing and food. And spending on services, which represent two-thirds of consumer spending, barely grew. That led many analysts to speculate that consumers might be giving up vacations and eating out less because of the weak economy.

"Today's report was a good reminder that much of what consumers spend their money on is not purchased at the shopping mall, but is rather spent on their homes and on their health," said James Marple, senior economist at TD Economics.

Perhaps the best news in the report was that Americans earned more in October after five straight months of paltry pay increases. Income rose 0.4 percent last month, the best showing since March. Private wages and salaries drove the gain.

And when subtracting taxes and adjusting for inflation, incomes rose 0.3 percent in October.

Many Americans chose to save the extra money. The savings rate ticked up to 3.5 percent of after-tax incomes from 3.3 percent in September — the lowest level since December 2007, the month the recession started.

Also Wednesday, it was reported that the number of Americans seeking unemployment benefits rose slightly last week to a seasonally adjusted 393,000 after two months of steady declines.

The four-week average of applications, which smooths week-to-week fluctuations, fell to its lowest level since April, the Labor Department said. A downward trend suggests companies are laying off fewer workers.

Businesses cut orders for durable goods in October, the Commerce Department said in a separate report. The 0.7 percent decline was largely because of a big drop in volatile commercial aircraft orders.

Still, spending on so-called core capital goods, which are considered a good proxy for business investment plans, dropped by the most since January. That followed two straight months of gains.

Durable goods are products expected to last at least three years. Orders tend to fluctuate sharply from month to month.

Joel Naroff, chief economist at Naroff Economic Advisors, said it was possible that the weak consumer spending last month could be temporary, given that the trend in service spending had been more positive in recent months.

Naroff said spending should rebound to support economic growth of roughly 3.5 percent in the final quarter.

Consumer spending weak, economy news mixed as holiday shopping season arrives 11/23/11 [Last modified: Wednesday, November 23, 2011 9:42pm]
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