Originally created 11/28/02

Consumer spending rebounds; jobless claims plunge

WASHINGTON -- Consumers snapped out of a September funk and got into a buying mood last month, ratcheting up their spending by a solid 0.4 percent. It was the biggest increase in three months.

The rebound reported by the Commerce Department Wednesday came after consumers cut their spending by 0.4 percent in September as economic uncertainties made them more cautious. October's fresh start was led by higher spending for "nondurable" goods, such as clothes and food.

Americans' incomes - including wages, interest and government benefits - edged up by 0.1 percent in October, following a 0.4 percent advance the prior month.

October's spending figure was slightly stronger than the 0.3 percent increase that many analysts were predicting, while income growth was in line with projections.

The latest snapshot of consumer activity along with a report Tuesday by the Conference Board showing improved consumer confidence in the economy in November raised hopes that the holiday shopping season will turn out to be decent - and not the dud many analysts feared.

In two other encouraging reports, new claims for unemployment benefits dropped last week to a 21-month low, the Labor Department said.

New claims for jobless benefits fell by a seasonally adjusted 17,000 to 364,000, the lowest level since Feb. 17, 2001. The report beat analysts' expectations. They were forecasting a rise in new claims.

And, orders to U.S. factories for big-ticket manufacturered goods rose 2.8 percent in October, after declining in the previous two months, the Commerce Department reported. October's performance was stronger than the 1.8 percent increase economists predicted.

Much of last month's strength came from a huge, 65.2 percent increase in orders for communications equipment, the largest gain since January 1997. Orders for cars, machinery and metal products also went up.

The 0.4 percent increase in consumer spending in October was the largest since a 1.1 percent jump in July.

Consumers have been carrying the economy all year. Their spending accounts for two-thirds of all economic activity in the United States. Economists are hopeful that consumers will keep their pocketbooks and wallets open wide enough to prevent the economic recovery from fizzling.

The economy, knocked out by last year's recession, has been struggling to get back to full health. One of the crucial ingredients to that recovery is a sustained turnaround in capital spending by the nation's businesses.

Businesses have been wary of making big commitments in spending and hiring as they face economic uncertainties and try to restore profits, which took a hit during the slump.

The Federal Reserve cut a key interest rate this month by a half percentage point, its first rate reduction this year. Fed policy-makers hope lower rates will encourage consumers to spend more and businesses to step up capital investment, forces that would bolster economic growth.

Fed Chairman Alan Greenspan said earlier this month he thought the most likely outcome for economic growth is "to come out of this soft spot and to start accelerating."

He said that if this occurs, the central bank will be ready to quickly reverse course and start pushing interest rates higher to make sure that inflation does not get out of control.

So far this year, consumer spending has been supported by a number of factors. They include: Low interest rates, zero percent financing offers, rising home values and extra cash left from a mortgage refinancing boom. Those factors have been offsetting negative ones including, the roller-coaster stock market and worries about a war with Iraq.

In October, consumer spending on "nondurable" goods rose by 0.7 percent, a turnaround from the 0.1 percent drop in September. Spending on services went up 0.5 percent, on top of a 0.4 percent increase. But spending on "durable" goods - big ticket items, such as cars and appliances, dropped by 1 percent. But that marked a smaller cutback than the 5.1 percent decline in September.

A reduction in spending on cars was a big factor behind the drop in spending on durable goods in both September and October. Car sales have been extremely brisk for much of the year as people have taken advantage of free-financing and other deals. But sales have been slowing recently.

Americans' disposable, or after-tax, income rose by 0.2 percent in October, down from a 0.5 percent gain.

With spending outpacing income growth, the nation's personal saving rate - savings as a percentage of after-tax income - dipped to 4.2 percent in October from 4.4 percent in September.


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