By Neil Irwin and Dana Hedgpeth
Washington Post Staff Writer
Thursday, November 26, 2009
A new round of economic data released Wednesday offers evidence that the economic expansion has continued through the latter part of the year but raises questions about the strength of the industrial sector in the months ahead.
Consumer spending rose a higher-than-expected 0.7 percent in October, the Commerce Department said, and personal income rose 0.2 percent. Those numbers support the idea of a steady, if unspectacular, expansion in the economy as the fourth quarter began.
Spending by consumers drives about two-thirds of economic activity and will be crucial to any sustained recovery -- but so far Americans have returned to stores only gradually, helping to explain the sluggish growth. Government spending has been a major driver of the economic expansion that began over the summer.
The Labor Department said that 466,000 people filed first-time applications for unemployment insurance benefits last week, the lowest level in more than a year, indicating that while job losses remain high, they are moderating.
More disappointingly, orders for durable goods -- items expected to last for several years -- fell unexpectedly, dropping 0.6 percent, mainly attributable to a decline in defense orders. That is a negative sign for the nation's industrial sector in the months ahead.
Taken together, the reports give some reason for optimism heading into the crucial holiday shopping season. The job market, while still bad, is continuing its gradual improvement, and consumer spending is expanding gradually. The open question now is whether the apparent economic growth can continue into 2010, and if so, whether it will do so with any momentum -- and the durable goods number is not very promising on that front.
Economists are generally expecting modest sales increases at retailers this holiday season, as consumers remain cautious but increase their purchases over last year's depressed levels. The jump in consumption spending in October supports that idea.
"The news on the consumer is okay," said Michael Feroli, an economist at J.P. Morgan Chase. "It's definitely not the collapsing consumer that everybody had been fearing. You're seeing modest growth in spending."
The same report found that personal income rose in October, as compensation to workers edged upward. But because spending rose faster than incomes, the personal savings rate declined to 4.4 percent from 4.6 percent.
The fall in jobless claims continued a very slow decline in the indicator since the spring, and represents the lowest level of claims for unemployment insurance benefits since September 2008, when the financial crisis and recession deepened.
The claims number gyrates from week to week, but a more reliable indicator of the number of people claiming jobless benefits, the four-week moving average of such claims, also fell, to 496,500 from 513,000. And the number of people receiving ongoing unemployment benefits fell as well, to 5.4 million from 5.6 million.
"The numbers are definitely heading in the right direction," said Steven Wieting, a U.S. economist with Citigroup Global Markets. "Altogether, these were relatively optimistic."
Excluding defense-related goods, orders for durable goods such as automobiles, airplanes and industrial machinery actually rose 0.4 percent, and economists cautioned against reading too much into one month's results.
Nonetheless, it is another sign that the sharp rise in industrial activity late this summer has not carried over to the fall.
There was a surge in production of goods including machinery, computers, engines, turbines and electrical equipment in July, August and September as inventories were replenished, but that has since flattened out, according to Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.
"It means that the talk of a V-shaped recovery is not real," Meckstroth said. "You can't expect the industrial sector to bounce back like the stock market did. It is impaired."
Companies are simply repairing and replacing necessary equipment instead of having real growth demand, Meckstroth said.
One reason for the uneven recovery is that construction of shopping malls, office buildings and other non-residential buildings is still falling. Manufactured products -- such as steel, bricks, concrete, drywall, office furniture and computers -- that go into these buildings will as a result be down.