Economy nears year end in more upbeat mood

/ Source: msnbc.com staff and news service reports

The economy gave off signs that it was continuing to heal, although slowly and in fits and starts, as one of its roughest years ever was drawing to a close.

Consumer spending, one of the economy's main engines, rose moderately in November, boding well for the crucial holiday season. People's incomes grew too, although the gains came from rising stock prices rather than increases in wages and salaries.

And consumer sentiment rose in December to its highest level since June.

"The data releases today support our estimate that GDP growth probably accelerated to between 3.5 percent and 4.0 percent annualized in the fourth quarter," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.

But none of it is quite enough to make a large dent in the 9.8 percent employment rate. Slightly fewer people applied for jobless benefits last week, the second decline in three weeks, showing the labor market still struggling to make solid progress.

And housing remains a drag on the economy. More people bought new homes in November, though far too few to signal better times are ahead for the battered housing industry. Sales rose 5.5 percent to a seasonally adjusted annual rate of 290,000 units, the government said. That's less than half the rate that economists consider healthy. And the increase follows a dismal October pace that nearly matched the lowest level in 47 years.

On the bright side, the Commerce Department said spending rose 0.4 percent after increasing by an upwardly revised 0.7 percent in October. Economists polled by Reuters had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent last month after a previously reported 0.4 percent gain in October.

The report also showed the Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy -- rose 0.1 percent after being flat for four straight months.

Meanwhile, the Labor Department said the number of people seeking jobless benefits edged down by 3,000 to a seasonally adjusted 420,000 in the week that ended Dec. 18.

Weekly unemployment applications at around 425,000 signal modest job growth. But economists say applications would need to dip consistently to 375,000 or below to indicate a significant decline in unemployment. Weekly applications peaked during the recession at 651,000 in March 2009.

The four-week average, a less volatile measure, rose slightly to 426,000. The average had fallen for six straight weeks to the lowest level in more than two years.

Factory orders
At factories, orders for long-lasting manufactured goods outside of the volatile transportation category rose by the largest amount in eight months in November. Factories saw demand increase for computers, appliances and heavy machinery.

The Commerce Department said total orders for durable goods dropped 1.3 percent, a decline that reflected sagging demand for aircraft and autos. But excluding transportation, orders rose 2.4 percent, the best showing since last March.

"Durable goods orders were reassuring in that we saw a manufacturing plateau over the summer and while the number released today was not strong, at least it showed some resilience in terms of capital goods orders apart from aircraft," said Pierre Ellis, a senior economist at Decision Economics in New York.

The gains in personal spending were the latest to suggest an acceleration in the growth pace this quarter after output increased at a 2.6 percent annualized rate in the July-September period.

Consumers' incomes grew 0.3 percent last month, lifted by gains from fatter stock portfolios. Wages and salaries, however, barely budged. Hiring slowed to a crawl in November and paychecks got thinner. By contrast, incomes increased 0.4 percent in October, reflecting stronger wage gains from a better hiring climate that month. Income growth is the fuel for future spending.

Nevertheless, consumers seem to be more upbeat. They hit malls and stores in droves over the final shopping weekend before Christmas.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment came in at 74.5, up from 71.6 in November.

It was slightly below the median forecast of 74.7 among economists polled by Reuters.

"The overall tenor of news about recent economic developments was on balance more favorable than at any time during the past six years," wrote Richard Curtin, the survey's director.

Upbeat news
Twenty-seven percent of consumers spontaneously reported upbeat news about employment gains, the highest proportion since 1983, he wrote.

The survey's barometer of current economic conditions was 85.3 in December, up from 82.1 percent in November but below a forecast of 86.

The survey's gauge of consumer expectations, which more closely projects the direction of consumer spending, rose to 67.5, also the highest level since June. That was above November's 64.8 percent, and in line with expectations.

A price gauge tied to Thursday's consumer spending report showed that prices — excluding food and energy — rose just 0.8 percent for the second straight month. That is the smallest gain on records stretching back to 1960.

Consumer spending accounts for roughly 70 percent of economic activity. A rise in consumer spending is a key reason why analysts believe the economy picked up in the final three months of this year.

"Rising stock prices, diminishing debts, and returning jobs have American consumers unleashing two-year's worth of pent-up demand accumulated during the Great Recession," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

"The momentum should carry into the New Year given the reduction in employee payroll taxes starting in January."

Analysts project the economy is growing at an annualized rate of at least 3.5 percent in the October-December quarter, up from a 2.6 percent pace in the July-September period.

For the final three months of this year, analysts predict consumer spending rose at an annual rate of up to 4 percent. Still, consumers would have to double that pace to match the spending rate recorded in the spring of 1983, after the 1981-1982 recession. That pace helped the economy grow at a rate of 9.3 percent and lead the country to a recovery.

Thursday's report also showed that consumers saved 5.3 percent of their disposable income in November. That was down slightly from a 5.4 percent savings rate in October.

Analysts predict the savings rate will hover around that high range in the coming months. Americans saved 5.9 percent of their disposable income in 2009, the most since 1992. Before the recession, they were saving just over 1 percent.