Ahead of the Bell: Consumer Spending

AP News
Posted: Nov 01, 2010 7:38 AM
Ahead of the Bell: Consumer Spending

Economists believe that consumers kept spending at a modest pace in September, reflecting modest growth in their incomes.

Economists at Barclays Capital forecast that consumption spending rose 0.4 percent in September and personal incomes increased 0.3 percent. The Commerce Department is scheduled to release the new report at 8:30 a.m. EDT Monday.

Consumer spending is closely watched because it accounts for 70 percent of the economy.

The government reported Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 2 percent in the July-September quarter. It marked only a small improvement from an anemic 1.7 percent GDP growth rate in the April-June quarter.

The third quarter increase was helped by 2.6 percent growth rate for consumer spending. That was up from a 2.2 percent increase in spending in the second quarter and was the fastest pace since a 4.1 percent quarterly gain at the end of 2006, before the recession hit.

Even with the improvement in consumer spending in the third quarter, economists are cautious about how quickly spending might return to pre-recession growth rates. That is in large part because unemployment remains so high. With so many people still out of work, income growth has been anemic, meaning that households don't have the resources to boost spending.

A 0.3 percent rise in personal incomes would come after a 0.5 percent jump in August. However, that gain had been propelled by the reinstatement of the government's extended unemployment benefits program, which had temporarily lapsed in July after Republicans had blocked an extension. Without the swing in extended jobless benefits, the rise in incomes would have been a much more modest 0.2 percent in August.

Because of the expectation of only modest gains in spending in coming months, economists believe that overall growth will not improve much in the final three months of the year. A new AP Economy Survey forecasts that the GDP will grow at a 2.4 percent rate in the October-December quarter, a level far too weak to make a dent in high unemployment levels.

The economists at Barclays Capital expect the jobless rate to remain stuck at 9.6 percent when the government releases the September unemployment rate on Friday.