The economy just posted its best six-month stretch in 11 years, the labor market is on a record streak of job creation and gas prices are falling. But consumers — a key driver of U.S. economic growth — have not yet fully joined the party.
With incomes growing at a frustratingly slow pace, average Americans are opening their wallets only enough to keep the economy expanding, but not spending at a robust pace, according to a government report released Wednesday.
"A lot of the data suggest we're not still in the wake of the Great Recession and financial crisis, but consumers have not forgotten those times," said Chris Rupkey, chief financial economist at Union Bank in New York.
"People are quite terrified of what happened in 2008 and 2009," he said.
Consumer spending rose 0.2% last month, the Commerce Department said. It marked a bounce-back after spending barely budged in September, but came in below analysts' expectations.
On Tuesday, the economy got an unexpected boost from revised Commerce Department figures showing that total economic output for the third quarter had grown 3.9%, higher than initially estimated.
Combined with a 4.6% annual growth rate in the second quarter, the economy produced its best back-to-back quarters since 2003, though much of the second-quarter growth came from pent-up demand after a severe winter led to the economy contracting in the first three months of the year.
On Wednesday, however, the lackluster spending and income reports were among other economic data released that pointed to slowing economic growth for the last three months of the year.
That's partly to be expected, considering the economic aberration of contraction and accelerated growth in the first half of the year.
Economists have forecasted growth of about 3%, annualized, for the fourth quarter, in part, because the U.S. faces head winds from a global slowdown. Japan said last week it had fallen into recession. The
The Organization for Economic Cooperation and Development, a group of the world's 34 most advanced economies, downgraded its global forecast this week.
"We are far from being on the road to a healthy recovery," said Angel Gurria, the organization's secretary general.
The U.S. has been the bright spot in the world economy. But Wednesday's consumer spending figures and other economic data indicate a 3% annual growth rate in the fourth quarter might be optimistic.
Sales of newly built homes rose a less-than-expected 0.7% in October, and September figures were revised down.
A closely watched indicator of business investment — orders for non-defense capital goods, excluding aircraft — was down 1.3% in October for the second straight month.
Still, the job market has been posting strong numbers. The economy added 214,000 net new jobs in October, a record 49th-straight month of overall job gains.
It also was the ninth straight month the economy added more than 200,000 jobs, the best streak since the 1980s.
Despite an unexpected jump in jobless claims last week to 313,000, economists expect the job-creation pace is continuing in November.
The University of Michigan and Thomson Reuters said Monday their consumer confidence index for November rose to 88.8, the fourth straight monthly gain. Though the latest reading was the highest since July 2007, five months before the Great Recession began, analysts were expecting it would tick up a bit more.
Consumers are in a buying mood, economists said, but they're limiting spending because their incomes are not rising very fast.
Personal income grew 0.2% in October, the same as the previous month, a pace slower than it grew during the summer, the Commerce Department said. Analysts had forecast incomes would jump 0.4% last month.
Stuart Hoffman, chief economist at PNC Financial Services, called the latest income data disappointing.
"The income growth is adequate," he said. "Not ample, but adequate."
Fortunately for consumers, inflation remained low in October. Prices rose just 0.1% and were up 1.4% for the 12 months that ended Oct. 31. That's well below the Federal Reserve's 2% annual target.
The low inflation, combined with a steep drop in gasoline prices in recent weeks, means even the weak income growth is producing gains for consumers.
"The drop in gas prices means the incomes that people have are stretching a lot further," Hoffman said. "What you don't pump into your car I think is going to be left over to pump up other kind of spending."
He's still expecting the economy to grow at a 3% annual rate in the fourth quarter.
But Chris Christopher, a U.S. economist at IHS Global Insight, said average Americans don't make the connection between inflation and income. Besides, rising food prices are eating into some of the savings from lower gasoline costs.
"Consumers don't make all the calculations and have a big massive spreadsheet and say, 'I'm much better off,'" he said. "They would like to see some wage growth."
Average hourly earnings were up just 2% for the 12 months that ended Oct. 31.
Despite the slow income growth, Christopher is expecting a good holiday shopping season. He forecasts retail sales to rise 4.2% compared with last year.
Part of that forecast, however, is because last year's holiday season wasn't particularly good, following a federal government shutdown that eroded consumer confidence.
"It's a low bar," he said.