Incomes, spending post gains; new-home sales sink |

Incomes, spending post gains; new-home sales sink

AP Economics Writer

WASHINGTON – Personal incomes rose in November at the fastest pace in six months, while spending posted a second straight increase. But economists cautioned that the gains remain too weak to sustain a strong 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. Still, 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.

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Contributing to the cautionary picture was a separate report Wednesday 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.

Economists viewed the two reports as evidence that the recovery from a deep recession is proceeding in fits and starts, with households struggling with a bleak job market. At the same time, analysts said the economy is much improved from this time last year, when the nation was gripped by the financial crisis.

“People are continuing to pay down their debts, and they remain concerned about their financial futures and whether they will have jobs,” said Sal Guatieri, an economist at BMO Capital Markets. “Santa’s toy bag won’t exactly be brimming with goodies this year, but at least he will show up, unlike last year.”

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 11 percent slump in November new-home sales from October’s pace shows consumers are taking their time after an extension of a deadline for first-time buyers to qualify for a tax credit. The incentive was set to expire at the end of November. But Congress extended the date to April 30 and expanded the program to include current homeowners who move.

David Crowe, chief economist at the National Association of Home Builders, called the results “pretty awful.”

New-home sales are considered a barometer of future real estate activity because they reflect sales agreements signed but not yet completed. That’s why most economists expect completed sales to decline during the winter months.

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