Tags: US | Economy

Economy Gets Lift from Temporary Government Aid

Friday, 01 Oct 2010 03:10 PM

 

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A flurry of new data Friday showed the economy is improving — with temporary help from the government.

Consumer spending rose 0.4 percent in August and incomes increased 0.5 percent, the largest gain in eight months, the Commerce Department said. Still, the income gain was propelled mostly by the government's short-term extension of unemployment aid, not wage gains.

A big jump in government building projects lifted construction spending in August 0.4 percent, Commerce said in a separate report. That offset the weakest level in private construction spending in 12 years.

Separately, a private trade group said manufacturing activity expanded in September for the 14th straight month, although it was the slowest pace in 10 months. The Institute for Supply Management said its manufacturing index read 54.4 in September. A reading above 50 indicates growth.

The reports point to an economy that is growing, but at a sluggish rate and not fast enough to drive down the 9.6 percent unemployment rate.

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. Spending isn't likely to see a big gain until income growth accelerates.

The overall economy grew at an 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 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.

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.

The rise in consumer spending in August was led by gains in routine household purchases, such as food and clothing. Spending on big-ticket items, such as autos, fell in August. Spending on services, a broad category that includes everything from haircuts to apartment rents, edged up slightly.

Private construction fell in August for a fourth consecutive month. The 0.9 percent decline left private sector building at an annual rate of $498.2 billion, the slowest pace since January 1998.

Government spending rose 2.5 percent to an annual rate of $313.6 billion. It was led by a 2.7 percent rise in spending on state and local building projects and a 0.7 percent increase in federal building projects.

Government construction has received a boost from the billions of dollars included in the original $787 billion economic stimulus program, which President Barack Obama proposed and Congress passed in February 2009 to help jump-start economic activity.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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