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US consumer spending up 0.2% in Oct

For 2008, the White House also expects real GDP growth of 2.7 per cent

(WASHINGTON) Battered by a slumping housing market and a credit crunch, US personal spending edged up 0.2 per cent in October, the smallest amount in four months, while prices rose at a modest pace, Commerce Department data showed yesterday in a report that may heighten concerns about the health of the US consumer.

Personal income grew at a 0.2 per cent annual rate in October, the poorest showing in six months, below the 0.4 per cent reading in September.

The weak gains in spending and incomes were likely to raise new worries about spreading economic weakness caused by a severe slump in housing and a credit crisis triggered by rising mortgage defaults.

In addition, consumers are also being battered by surging prices for petrol and other energy products.

A gauge of core inflation tied to consumer spending edged up just 0.2 per cent in October and is up only 1.9 per cent over the past year. That increase is within the Fed’s one per cent to 2 per cent comfort range for core inflation, which excludes energy and food.

‘Consumer spending is under serious pressure,’ Joshua Shapiro, chief US economist at Maria Fiorini Ramirez Inc in New York, said before the report.

‘A slowdown in the labour market, higher energy prices and the collapse in housing are coming home to roost.’ The personal consumption expenditure (PCE) price index, a key measure of inflation, rose 0.3 per cent. Core PCE prices, which strip out food and energy items, rose at a 0.2 per cent rate, matching economists’ expectations.

Prices for US government securities recovered some losses, while stock futures held sharp gains after the figures were released.

The report comes as economists and investors worry that the triple-blow of a weak housing market, tightening credit terms and high energy prices will curb consumer spending, which is the driving force behind the US economy.

Meanwhile, a separate Commerce report showed that construction spending fell by 0.8 per cent last month, the biggest decline since July. Activity in the besieged housing industry fell for a 20th straight month while nonresidential construction weakened as well.

Separately, the National Association of Purchasing Management-Chicago reported that its barometer of business activity climbed in November. The group’s index rose to 52.9, from 49.7 the previous month.

The White House raised its US economic growth forecast for 2007 on Thursday but lowered its projection for next year as trouble in the housing and credit markets along with high energy prices take their toll.

In its twice-yearly forecast, which will be incorporated in the Bush administration’s fiscal 2009 budget proposal due early next year, the White House said it now expects 2007 real gross domestic product growth of 2.7 per cent, up from its June forecast for 2.3 per cent.

For 2008, it also expects real GDP growth of 2.7 per cent, which compares with its earlier outlook for 3.1 per cent growth.

‘While the difficulties in housing and credit markets and the effects of high energy prices will extract a penalty from growth, the US economy has many strengths and I expect the expansion to continue,’ US Treasury Secretary Henry Paulson said in a statement.

 

Source: AP, Reuters, Bloomberg (Business Times 1 Dec 07)

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