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Consumers Spend More, Worry More

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Oct. 31, 2005--Americans may be increasingly concerned about the economy, but those fears haven't led to penny-pinching. In fact, just the contrary.

While consumer confidence continued to sag this month, stronger spending bolstered the nation's economic growth, according to government and private-sector reports released Friday.

Despite higher energy costs and back-to-back storms in the Gulf Coast region, the economy expanded by 3.8% in the third quarter, up from a previous reading of 3.3%, marking the 10th straight quarter of growth rates above 3%, the Commerce Department reported. That's the longest quarter-to-quarter growth streak since the early 1980s.

The positive news also extended to businesses owners -- Labor Department figures on employment costs, also released Friday, showed the slowest rise in six years.

Overall, market watchers said, the data point to long-term economic strengths -- which have propelled a number of small-business owners to continue investing in their companies.

"Small businesses are always going to keep on eye on the likelihood of consumers buying more goods," said Todd Rosin, a spokesman at Bank of America in Seatle. "But right now, the business owners we're talking to are still borrowing, still asking for financing, and taking out credit cards. There's no sign of impact" from lower consumer sentiment.

By contrast, while they're still spending at a brisk pace, consumers themselves have yet to shake the gloomy mood caused in large part by high summer gas prices only made worse by Hurricane Katrina, which slammed into the Gulf Coast on Aug.29.

The University of Michigan's sentiment index dropped in October to 74.2, from 76.9 last month. The survey's expectations index also dropped slightly, to 63.2 from 63.3, and the current conditions index fell to 91.2 from 98.1.

The declines were blamed on concerns about rising heating costs in the months ahead, combined with higher interest rates and falling incomes, according to the monthly index, which surveys some 300 households nationwide.

Still, those fears haven't kept consumers from spending, the Commerce Department said, crediting an upswing in GDP growth on solid outlays from consumers and the government alike.

Consumer spending was up 3.9%, the highest gain this year, from 3.4% over the previous quarter. The gains followed more purchases of both durable and non-durable goods. Excluding costly gas and food spending, however, the index rose just 1.3%.

Spending on general services like transportation, health, and recreation was also up 3.2%, from 2.3%.

Over the same period, federal government spending jumped by 7.7%, from 2.4%, the bulk of which owing to "national defense," according to the report.

Also up were business investments and residential housing construction, with the trade deficit narrowing to $611.8 billion.

"It's not unusual for figures like these to decouple in the short-term," said Haseed Ahmed, an economist at JP Morgan Chase in New York, referring to the widening gap between consumer confidence and increased spending. "That said, either spending will have to start going down soon, or confidence will pick up. It's likely they will meet somewhere in the middle."

Holiday shopping, which is already kicking off early this year, should also boost spending, he said.

The Commerce Department did not separate out the effects of Hurricanes Katrina and Rita on overall economic growth, though it did estimate their combined impact may have caused as much as $40 billion in lost wages and rents.

As a result, third-quarter personal income was up just 2.8%, to $71.8 billion, following a 6% rise the previous quarter. "Rental income and proprietors' income were reduced by the property damages cause by the hurricanes," the department reported.

Last updated: Oct 31, 2005




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