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Incomes rise at fastest pace in six months

Consumer spending rose for a second straight month in November as incomes recorded their biggest gain in six months, data showed on Wednesday.
The rise in consumer incomes helped bolster spending, which rose 0.5 percent in November. Both the income and spending gains were slightly less than economists had expected. Jim Prisching / AP
/ Source: The Associated Press

Personal incomes rose in November at the fastest pace in six months, while spending posted a second straight increase. But economists caution that the gains remain too weak to sustain a strong U.S. economic recovery.

The Commerce Department said Wednesday that personal incomes rose 0.4 percent in November, helped by a $16.1 billion increase in wages and salaries. It reflected the drop in unemployment that occurred last month.

The rise in incomes helped bolster spending, which rose 0.5 percent in November. Both the income and spending gains were slightly less than economists had expected.

After taking inflation into account, after-tax incomes are rising at an annual rate of just 1.2 percent. Economists say the recovery will require higher levels of income and spending. This is especially true at a time when households are using some income to shrink debt loads and rebuild savings, rather than spend.

"Annualized income growth of a little over 1 percent will not be enough to drive a significant recovery in consumption at the same time that debt needs to be paid down," said Paul Dales, U.S. economist at Capital Economics.

Contributing to the cautionary picture was a separate report that sales of new homes plunged unexpectedly last month to the lowest level since April. November's sales fell 11.3 percent. And sales were down 9 percent from a year ago.

The median sales price of $217,400 was down nearly 2 percent from $221,600 a year earlier, though up about 4 percent from October's level of $209,400.

The report signaled that the housing market's recovery remains rocky.

Consumer spending, in particular, is closely watched because it accounts for 70 percent of economic activity. A revival in spending this summer, spurred by the government's Cash for Clunkers program, helped lift overall economic growth back into positive territory, the strongest signal yet that the country has emerged from its deepest recession since the Great Depression.

The government on Tuesday trimmed its estimate for third-quarter growth in the gross domestic product to an annual rate of 2.2 percent, down from a previous estimate of 2.8 percent. Still, GDP showed growth after a record four consecutive quarters of declines.

Many economists say GDP growth in the current quarter, helped by solid gains in consumer spending, will amount to an annual rate of around 4 percent. But they warn that the rebound could falter early next year as the benefits of government stimulus efforts wane and the unemployment rate remains high.

The jobless rate dipped to 10 percent in November, down from a 26-year high of 10.2 percent in October. But many economists say it will stay high as discouraged job seekers return to the labor market to look for work and employers remain reluctant to hire.

The 0.4 percent rise in incomes followed a 0.3 percent October gain. It was the best showing since a 1.5 percent spurt in May, a month when incomes were boosted by government payments and tax relief from the $787 billion economic stimulus program.

The 0.5 percent rise in consumer spending reflected the surprisingly strong 1.3 percent jump in retail sales that occurred during November — a boost that came from shoppers crowding malls seeking deep discounts over the Thanksgiving weekend.

A major East Coast snowstorm sharply cut into sales on the last Saturday before Christmas. Merchants are hoping that last-minute shoppers will compensate by coming out in force in the final days remaining before Christmas.

The rise in incomes and comparable rise in spending left the savings rate unchanged in November at 4.7 percent of after-tax incomes.

A price gauge tied to consumer spending edged up a modest 0.2 percent in November from the previous month, and was actually flat excluding energy and food. Over the past year, this price gauge excluding food and energy is up just 1.4 percent — well within the comfort zone of officials at the Federal Reserve.

The Fed has been able to keep a key interest rate at a record low level for the past year because inflation pressures haven't been a threat.