Image: Lowe's customers
Phil Coale  /  AP
In this Nov. 16, 2009 photo, customers shop for lumber inside Lowe's in Tallahassee, Fla. Consumers got back in the buying mood in October as their incomes grew modestly.
updated 11/25/2009 9:22:30 AM ET 2009-11-25T14:22:30

Consumers got back in the buying mood in October as their incomes grew modestly, an encouraging sign for the budding economic recovery.

The Commerce Department reported Wednesday that consumer spending rose a brisk 0.7 percent last month, following a pullback in September when spending plunged 0.6 percent.

It was the best showing since a big 1.3 percent jump in August when the government's now-defunct Cash for Clunkers programs enticed people to buy cars.

Incomes, the fuel for future spending, rose 0.2 percent for the second straight month.

The rebound in spending shows that consumers -- who power 70 percent of national economic activity -- are managing for now to hold up under the weight of some heavy negative forces.

"Don't count consumers out. They are making a contribution to the recovery," said Ken Mayland, president of ClearView Economics.

But the fear among Federal Reserve officials and other economists is that negative forces -- including rising unemployment and hard to get credit, which makes it difficult to finance homes, cars and appliances -- will eventually cause consumers to turn more cautious, making for a lethargic recovery.

Still, Wednesday's figures seemed to blunt fears that consumers could clam up, sending the country into a "double dip" recession, although there continues to be concern that consumer spending will slow early next year.

The increase in consumer spending in October was bigger than the 0.5 percent rise economists expected. The growth in incomes matched expectations.

Personal savings rate drops
With spending outpacing income growth, Americans' personal savings rate -- savings as a percentage of after-tax income -- dipped to 4.4 percent in October from 4.6 percent in September.

Image: Graph on personal income
Consumers spent more on costly "durable" manufactured goods -- such as cars and appliances -- last month. Such spending rose 2.1 percent, compared with a 8.5 percent drop in September.

They also boosted spending 0.4 percent last month on "nondurables," such as food and clothes, down from a 0.7 percent gain in September. Spending on services rose 0.5 percent, up from a 0.3 percent gain. Details for specific goods or merchandise aren't broken out in the report.

Inflation, excluding food and energy, rose 1.4 percent over the past year, well within the Fed's comfort zone. That gives the central bank leeway to hold rates at record-lows near zero to nurture the recovery.

Many economists predict the Fed will keep rates there through the rest of this year and into part of 2010.

Fed: Jobless rate will continue to be high
After four straight losing quarters, the economy returned to growth last quarter. It grew at a 2.8 percent rate, the government reported Tuesday, weaker than first estimated.

Depending on how consumers behave in the rest of this quarter, the final three months of this year could come in slightly better -- in the 3 percent range, said Mayland. But many expect growth to slow early next year, with some saying it could drop off to a 1 percent pace if consumers tighten their belts.

The jobless rate now stands at 10.2 percent and is expected to climb higher, which could make consumers wary of spending, Fed officials and economists say.

The Fed said Tuesday that the pace of the recovery won't be strong enough to drive down the jobless rate any time soon.

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