Weak incomes cast pall on accelerating economy

Reuters News
Posted: Oct 27, 2011 4:54 PM
Weak incomes cast pall on accelerating economy

By Joe Wessels

CINCINNATI, Ohio (Reuters) - U.S. consumers dug deep to power the recent rebound in economic growth, but data showing stagnant incomes suggests they could be hard pressed to contribute much more.

Earlier in the year, a spike in gasoline prices and a sagging stock market led many Americans to hold back on purchases. But the government said on Thursday that consumer spending moved forward at a 2.4 percent annual rate in the third quarter, boosting the overall economy.

However, people dipped into savings to meet their needs. More worrisome, inflation-adjusted, after-tax income fell at a 1.7 percent pace -- the first decline in nearly two years.

That suggests the burst of spending, which fueled the strongest quarter of growth in a year, might be short-lived.

"I can barely pay my bills," said Yasha Davis, 39, an assistant chef at a small coffee shop in Cincinnati. "When I do spend money, I only buy what I need."

Weak incomes also mean people have less to save for retirement, which could eventually undermine their willingness to spend. Americans were able to sock away only 4.1 percent of their after-tax income during the third quarter, the weakest saving rate since 2007.

A recent surge in inflation is one reason consumers have lost ground. Fortunately, inflation is expected to slow sharply over the next year.

But even discounting the rise in prices, incomes grew at their slowest rate since the third quarter of 2009, when the country was just emerging from its deepest recession in decades.

The income and savings data shed light on the divide between economic readings that show healthy spending on things like refrigerators and surveys that show consumers feel very much down in the dumps.

With unemployment stuck above 9 percent, it's hard for people to ask for wage increases that can keep up with inflation. For every job open in the country, there are more than four people out of work.

"I don't see how it could get much worse," said Joe Brashear, 66, an architect whose firm recently laid off five other architects.

Indeed, the rebound in economic growth during the third quarter only looks strong compared to the frightfully weak readings clocked earlier in the year.

Gross domestic product expanded at a 2.5 percent annual rate, which is tame by historical standards and not enough to bring down unemployment.

"I don't know anybody who's better off now than he was a year ago," said Jose Lopez, a 67-year-old construction engineer who recently lost his job in Miami.

"People are not doing well."

(Additional reporting by Tom Brown in Miami; writing by Jason Lange in Washington; Editing by Andrew Hay)