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Nov 26, 4:59 PM EST

Weak consumer, business demand may slow US growth

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WASHINGTON (AP) -- U.S. consumers and businesses spent cautiously last month, a sign that strong growth during the spring and summer may decelerate in the final three months of the year.

The figures released Wednesday were a mild disappointment after data the previous day showed the economy had expanded at the fastest pace in over a decade in the second and third quarters.

"The economy is poised to slow again as we move into the fourth quarter, after a stellar catch-up from last year's horrific winter weather," Diane Swonk, an economist at Mesirow Financial, said in a note to clients.

Consumers opened their wallets a bit in October, boosting their spending by a lukewarm 0.2 percent. That was only slightly better than September's flat reading.

Yet incomes also rose just 0.2 percent, matching September's increase. Because hiring has been healthy this year, many economists have been expecting a stronger pickup in income. Limited increases in pay could restrain future spending by consumers, which accounts for 70 percent of the U.S. economy.

Businesses also cut back on orders for industrial machinery, computers and other equipment, a sign that business investment spending may slow in the October-December quarter. Factories received fewer orders for the second straight month in a key category that tracks business investment plans.

Paul Ashworth, an economist at Capital Economics, said he now expects the economy will expand at a 2.5 percent annual rate in the fourth quarter, down from an earlier forecast of 3 percent. Macroeconomic Advisers, a forecasting firm, projects growth of just 2 percent.

While those figures would represent modest progress, they are much lower than the third quarter's 3.9 percent expansion and the second quarter's 4.6 percent growth. The two quarters represent the best six-month pace since 2003.

Other data on Wednesday painted a mixed picture of the U.S. economy, adding to the year-end uncertainty.

In a positive sign, a measure of consumer sentiment by the University of Michigan rose to a seven-year high, suggesting consumers could ramp up their spending during the holiday shopping season.

With a steadily improving job market and falling gas prices, economists say American households are ready to shed any lingering caution. The National Retail Federation, a trade group, is forecasting that holiday sales will rise 4.1 percent from last year. That would be the biggest gain in three years.

Still, two additional reports Wednesday showed that housing, traditionally a key driver of the economy after recessions, remains sluggish. New home sales ticked up slightly to a seasonally adjusted annual rate of 458,000 in October. But that figure is up only 1.8 percent from 12 months ago.

Sharp price increases have likely held back sales: the price of a typical new home has soared 16.5 percent in the past year to $305,000.

Separately, the number of signed contracts to buy homes fell slightly in October, which indicates that sales of existing homes may decline in the coming months. Existing home sales rose last month to an annual pace of 5.26 million, their fastest this year. But that's still below the 5.5 million consistent with a healthy housing market.

Inflation remains low, which could also help boost spending over the holidays. A price gauge included in the spending report rose by just 1.4 percent over the past 12 months, well below the Federal Reserve's 2 percent inflation target.

Many economists are still optimistic that greater hiring, as well as fewer government spending cuts and tax increases, will boost growth to about 3 percent in 2015. That would be the first full year to record 3 percent growth since 2005.

The job market has made steady progress this year. Employers have added an average of 229,000 jobs a month through October. That would make hiring in 2014 the strongest that the U.S. has seen in 15 years. The unemployment rate has fallen to 5.8 percent, a six-year low, from 7.2 percent just one year ago.

Yet the number of people seeking unemployment benefits jumped last week to the highest level in nearly 3 months, a sign that layoffs have risen. The increase likely reflects seasonal job cuts at businesses affected by cold weather, such as construction firms. Most economists said the increase isn't a cause for concern.

The Federal Reserve last month recognized signs of the improving economy, but suggested that it may keep interest rates low for a "considerable time." Many economists believe with inflation still low, the Fed will wait until the middle of 2015 before it begins to boost interest rates.


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