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Economy likely to need more than holiday purchases | TribLIVE.com
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Economy likely to need more than holiday purchases

The Associated Press
| Thursday, November 25, 2010 12:00 a.m

WASHINGTON — Americans are earning and spending more, companies are shedding fewer workers and hopes are rising for the economy as the holiday shopping season starts.

Still, with businesses spending less on manufactured goods and new-home sales near their lowest level in 47 years, consumers alone might not be able to invigorate the economy and drive down unemployment.

All told, government data released the day before Thanksgiving suggest an improving economic picture. But it is increasingly dependent on the consumer, even with U.S. companies having reported record profits in the July-September quarter.

“Households are spending more, and that may signal they are starting to feel better about economic conditions,” said economist Joel Naroff of Naroff Economic Advisors. “It is the consumer that holds the key to the recovery and it looks like households are starting to turn the lock.”

Many retailers depend on the holiday shopping season to make their year. The November-December shopping season can account for up to 40 percent of retailers’ revenue and profits.

Consumers boosted spending 0.4 percent in October, up from a 0.3 percent increase in September, the Commerce Department reported Wednesday.

Many are benefiting from thicker paychecks. Americans’ incomes rose 0.5 percent in October, pulled up by a 0.6 percent rise in wages and salaries. That was after incomes didn’t grow at all in September.

At the same time, the pace of layoffs is slowing. Initial jobless claims dropped by 34,000 to a seasonally adjusted 407,000 in the week ending Nov. 20, the Labor Department said. Applications have fallen in four of the past six weeks.

Last week’s figure was the lowest since July 2008 and the first time that claims have fallen below 425,000 since then. Economists generally believe that weekly first-time applications for jobless aid would need to drop consistently below 425,000 to signal sustained job gains.

Even with last month’s pickup in spending, consumers are shying away from the type of buying needed to significantly lower the 9.6 percent unemployment rate. And economists expect more modest income gains in the months ahead. That’s why some doubt incomes will grow consistently and keep consumers spending enough to invigorate the economy.

“Households have started to pick up the baton of growth from businesses,” said Paul Dales, U.S. economist at Capital Economics. “Whether or not households will be able to shoulder the burden of growth on their own is another matter.”

ShopperTrak, a research firm that tracks sales and traffic at more than 70,000 outlets, now expects holiday sales to grow 3.2 percent. That’s up from a previous forecast of 2.9 percent. The upgraded forecast would mark a turnaround from the 0.4 percent sales drop in 2009, according to ShopperTrak’s calculations.

Even so, retailers will struggle for a piece of consumers’ wallets. Shoppers will want to stick to lists and focus on bargains, experts predict.

The National Retail Federation, the nation’s retail trade group, expects a 2.3 percent increase in holiday spending. That would fall short of the 10-year historic average of 2.5 percent, according to the retail trade group.

In other reports, an inflation index that the Federal Reserve monitors most closely is running at a record low. Prices for goods excluding food and energy rose just 0.9 percent in the 12 months that ended in October, the Commerce Department said. That was down from a 1.2 percent annual gain posted in September.

Even though shoppers welcome low prices, inflation is running at a pace below the Fed’s comfort zone of between 1.5 percent and 2 percent. Fed officials worry that very low inflation could devolve into deflation — a prolonged drop in the prices of wages, goods and services and in the value of assets like stocks or homes.

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