Extended jobless benefits, public construction boost economy; manufacturing activity grows

By Martin Crutsinger, AP
Friday, October 1, 2010

Economy gets lift from government aid

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

Consumer spending rose in August and incomes increased by the largest amount 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, 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.

And auto sales were a little better in September, thanks to the introduction of new car models and Labor Day promotions. Sales at Chrysler Group LLC and Ford Motor Co. rose slightly from August. They fell at General Motors Co. and were flat at Toyota Motor Corp. Car companies say a recovery is progressing, but it’s not as strong as they had hoped following a terrible 2009.

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 rose 0.4 percent in August, matching the July growth rate. Spending by Americans accounts for 70 percent of total economic activity. Until it returns to a stronger pace, the rebound from the recession will be held back. And spending isn’t likely to see a big gain until income growth accelerates.

“Consumers are spending moderately, saving moderately and making money moderately, which all point to moderate economic growth,” said Joel Naroff, chief economist at Naroff Economic Advisors.

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 0.5 percent rise in August 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 reduced 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.

Income from all sources totaled $12.57 trillion at an annual rate in August. The biggest part of that was wages and salaries, which accounted for 50 percent of income. By comparison, government unemployment benefits equaled $146.9 billion at an annual rate, or about 1 percent. Total government benefits — a broader category that includes Social Security, Medicare, disability benefits and unemployment benefits — equaled 18.5 percent.

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.

The manufacturing sector kept growing last month, but at the slowest rate since November. The Institute for Supply Management said its manufacturing index read 54.4 in September. A reading above 50 indicates growth.

American manufacturers have benefited from rising overseas demand which has offset to some extent the weak growth in U.S. consumer spending. A separate report Friday showed that the growth in Chinese manufacturing picked up in September after the Chinese economy had cooled a bit in the spring.

Construction spending rose 0.4 percent in August, but private construction fell 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.

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