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Updated: November 25, 2009 15:20 IST

Wary consumers, rising unemployment snag U.S. recovery

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In this file photo, the headquarters of the Federal Reserve Bank is seen at sunrise in Washington. The Fed says the unfolding recovery will probably be gradual, as modest growth keeps the nation's unemployment rate elevated over the next several years.
AP In this file photo, the headquarters of the Federal Reserve Bank is seen at sunrise in Washington. The Fed says the unfolding recovery will probably be gradual, as modest growth keeps the nation's unemployment rate elevated over the next several years.

Economists expect new reports on Wednesday to give a better picture of how things are shaping up for the final three months of the year.

New filings for unemployment benefits likely will show a slight improvement while consumer spending should post a rebound in October after an auto-related plunge in September. Sales of new homes are expected to grow, propelled by first-time buyers taking advantage of a special tax credit.

Even with signs of strength, economists worry the recovery could falter if consumer spending, which makes up 70 per cent of economic activity, drops in the face of unemployment that is already at the highest point in 26 years and is expected to keep rising.

Economists surveyed by Thomson Reuters expect that new applications for unemployment benefits dipped to 500,000 last week, from 505,000 the previous week. The four-week average for claims posted its 11th consecutive decline last week, falling to 514,000, the lowest level in a year.

The number of people receiving continuing claims is expected to fall slightly to 5.58 million for the week ended November 14, from 5.61 million in the previous week.

Still, such slight improvements will not be enough to keep the unemployment rate from rising. The jobless rate hit 10.2 per cent in October and many analysts believe it will keep rising to 10.5 per cent or higher before starting to improve next summer.

Some employers are continuing to lay off workers. Struggling Internet company AOL last week said it plans to cut up to 2,500 jobs, more than a third of its work force, once it is spun off from the media conglomerate Time Warner Inc. And Hartford, Connecticut-based health insurer Aetna said it will cut 625 jobs, or nearly 2 per cent of its staff, and will make similar job cuts in the first quarter of 2010 due to the lagging economy and the potential impact of health care reform.

Federal Reserve policymakers said at their November meeting that the unfolding recovery likely will be gradual with the unemployment rate probably remaining elevated over the next several years, according to minutes of the discussions released on Tuesday.

The weak jobs market, which is depressing incomes, is keeping a lid on consumer spending. Economists expect personal incomes rose 0.2 per cent in October, better than the flat reading in September. They expect consumer spending to increase 0.5 per cent in October, after falling 0.5 per cent in September.

The spending rebound likely will reflect that car sales recovered last month after a plunge in September following the end of the government’s popular Cash for Clunkers sales incentives.

While a 0.5 per cent rise in consumer spending would get the fourth quarter off to a solid start, economists worry such spending is unsustainable.

On the housing front, sales of new homes likely rose to an annual rate of 410,000 homes in October, from 402,000 in September, according to Thomson Reuters.

But like the rebound in consumer spending, the worry is that the strength in October reflects temporary factors that will fade in the months ahead. Sales of existing homes soared 10.1 per cent to a seasonally adjusted annual rate of 6.1 million units in October, the National Association of Realtors reported on Monday.

It was the biggest monthly increase in a decade but reflected a rush by first-time buyers to take advantage of a tax credit of up to $8,000 that had been scheduled to expire in November. Congress earlier this month extended the credit until next spring.

The overall economy grew at an annual rate of 2.8 per cent in the July-September quarter, the Commerce Department reported Tuesday. That was down from an initial estimate of 3.5 per cent growth in the third quarter, as consumer spending was weaker than initially estimated.

Many economists believe that growth will continue at around a 2.5 per cent rate in the current quarter but will slip to perhaps 1.5 per cent in the first half of next year as the impact from the government’s $787 billion stimulus program begins to fade.



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