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Consumer sentiment weak as growth slows

Consumer sentiment improved a bit in late September but remained weak as a mixed bag of economic reports added up to a picture of sluggish growth.
/ Source: The Associated Press

Consumer sentiment improved more than expected in September but was still stuck at its weakest level in more than a year due to economic worries among upper-income families, a survey released Friday showed.

The report was part of a mixed bag of economic data that added up to a picture of sluggish growth, especially in the private sector:

  • Consumer spending rose a bit in August while incomes increased by the largest amount in eight months, a gain that was propelled by the resumption of extended unemployment benefits.
  • Construction spending rose unexpectedly as public construction rebounded. But investment in private projects fell to its lowest in more than 12 years.
  • Manufacturing grew for a 14th straight month, but at slower rate, according to a private survey.  

An early rally on Wall Street faded a bit as investors digested the news suggesting a slowdown in growth. William Dudley, president of the powerful Federal Reserve Bank of New York, said in a speech that the pace of the economic recovery has been disappointing.

He said the Fed is likely to take additional action in an effort to boost the economy and lower unemployment from its current 9.6 percent official rate.

The Thomson Reuters/University of Michigan consumer sentiment index was 68.2 in September, up from a preliminary figure of 66.6 and higher than expected.

"The entire late September gain, however, was among households with incomes under $75,000 while upper income households reported much less favorable economic prospects," the survey's director Richard Curtin said in a statement.

Curtin said the divergence between the two income groups was partly caused by worries over a protracted delay to an extension of federal tax cuts to families with incomes above $250,000.

"It is hardly a surprise that potential reductions in after-tax incomes a few months from now will influence people's current spending decisions," he said.

Overall sentiment was still a bit lower than in August.

Separately the government reported that construction spending rose unexpectedly in August as public construction rebounded, but investment in private projects fell to its lowest in more than 12 years, a government report showed on Friday.

The Commerce Department said construction spending rose 0.4 percent to an annual rate of $811.8 billion. July's construction outlays were revised to show a bigger 1.4 percent drop instead of the previously reported 1.0 percent fall.

Economists polled by Reuters forecast construction spending falling 0.4 percent in August.

Spending on public projects rebounded 2.5 percent after dropping 1.1 percent in July.

The Institute for Supply Management said its manufacturing index read 54.4 in September, down from 56.3 in August. A reading above 50 indicates growth.

Strong growth in the industrial sector has helped lift the country out of the recession. Last month's report was better than expected and triggered an explosive rally on Wall Street. That kicked off the best September for the stock market since 1939. The Dow Jones industrial average gained almost 8 percent for the month.

Meanwhile consumer spending increased 0.4 percent in August, matching the July increase, the Commerce Department said Friday. The two increases followed June's flat reading on spending.

Incomes were up 0.5 percent, better than a 0.2 percent rise in July and a flat reading in June.

More spending and increased income are helping to sustain the economy, which is growing at subpar levels.

Consumer spending accounts for 70 percent of total economic activity and until it returns to a stronger pace, the rebound from the recession will be held back. But spending isn't likely to see a big gain until income growth accelerates.

The August rise in incomes would have been much lower — just 0.2 percent — without the extended unemployment benefits. The program had temporarily lapsed in July after Republicans blocked an extension. That lowered the total for incomes in the July report by about $17 billion at an annual rate.

The jobless benefits program resumed in August after Democrats gained enough votes to pass an extension through November. That boosted the total for incomes in the August report by approximately $21 billion.

The overall economy grew at a sluggish annual rate of 1.7 percent in the April-June quarter. Many economists expect growth to be around 2 percent for the rest of the year, mainly because of the weak growth in consumer spending.

"Consumption growth is unlikely to gain any real momentum when incomes are rising only modestly and households are still saving," said Paul Dales, senior economist at Capital Economics.

The two straight months of 0.4 percent gains in spending bolstered confidence that the country is not slipping back into a recession, fears that had been fueled by flat readings on spending in both April and June.

With incomes up slightly more than spending, the personal savings rate edged up to 5.8 percent of after-tax incomes in August. It was 5.7 percent in July. Both are much higher than the 2.1 percent average for the savings rate in 2007, before the recession began.

A key gauge of inflation tied to consumer spending showed prices rose a slight 0.2 percent in August. Excluding food and energy, prices were up 0.1 percent. This price gauge is up just 1.4 percent excluding food and energy over the past year, indicating that the weak economy has essentially banished inflation as a threat at the moment. .