Low inflation could give consumers more incentive to spend
By Christopher S. Rugaber
AP Economics Writer
WASHINGTON (AP) — The outlook for the U.S. economy brightened a little this week after reports that consumer prices stayed tame and homebuilder confidence rose to the highest level in six years.
A third report showed factory output grew only modestly in September, a reminder that the economy is still weak.
Low inflation could give consumers even more incentive to spend at a time when their confidence is at a five-year high. That could boost growth and help lift American manufacturers out from their slump.
The economy remains the top issues for voters with just three weeks left before Election Day.
The data showed:
— The consumer price index rose a seasonally adjusted 0.6 percent in September, the Labor Department said. The increase was driven by higher gas prices. When excluding gas and food costs, prices rose just 0.1 percent. Overall prices have risen just 2 percent in the 12 months that ended in September, in line with the Federal Reserve’s inflation target.
— The National Association of Home Builders said its survey of builder sentiment rose to a reading of 41 this month, the highest level since June 2006. The index is still below 50, which indicates negative sentiment about the market. But it has steadily climbed over the past year from a reading of 17, further evidence of a slow but steady housing recovery.
— The Federal Reserve said that output at factories, mines and utilities rose 0.4 percent in September after a sharp decline in August. Factory output, the most important component of industrial production, edged up only 0.2 percent last month. The report also noted that factory out fell in the July-September quarter.
That marked the first quarterly decline since the spring of 2009, when the country was still in recession.
The report on low inflation contributed to a second straight day of strong gains on Wall Street. The Dow Jones industrial average rose 127 points to close at 13,551, its biggest gain since Sept. 13. Broader indexes also gained.
Modest inflation leaves consumers with more money to spend. Consumer spending drives roughly 70 percent of economic activity.
The small increase in prices prompted the government to raise Social Security benefits 1.7 percent next year for 56 million recipients. The government increases benefits each year if prices rise. The boost was one of the smallest since automatic adjustments began in 1975.
Still, elderly Americans and other recipients will have a little more buying power next year. Social Security payments for retired workers average $1,237 a month, or about $14,800 a year. The increase is equal to roughly $21 more a month.
Consumers may also be inclined to step up spending if their home values keep rising.
The homebuilder survey showed that sales and builders’ outlook over the next six months remained unchanged from September’s improved levels. And a measure of buyer traffic rose to its highest level since April 2006.
Americans are buying homes again, pushing up sales and prices after a six-year slump. The recovery has been modest and housing has a long way back to full health. But the steady increases suggest housing is no longer weighing on growth.
The same can’t be said for manufacturing, which has slumped since spring.
Europe’s debt crisis and slower growth in China and other emerging markets have hurt demand for American exports. Many companies have also held back on purchases of equipment and machinery. They are waiting to see if Congress can reach a deal before the end of the year to avert sharp tax increases and spending cuts.
The September growth in factory output was an encouraging sign that manufacturing may be starting to rebound. A separate survey from the Institute for Supply Management also showed manufacturing activity expanded for the first time since May, buoyed by new orders and hiring.
A more confident consumer could help revitalize sluggish factory growth.
Consumer sentiment rose to a five-year high in October, according to a survey by the University of Michigan. And Americans stepping up their spending at retail businesses in September for the second straight month, buying more cars and iPhones.
Peter Newland, an economist at Barclays, said the increase in consumer spending should translate into more factory orders and stronger production in the coming months.
Still, most economists said the weak overseas growth should drag on U.S. manufacturing for some time.
“There is still little evidence to suggest that a sustained upturn in the manufacturing sector is just around the corner,” Erik Johnson, U.S. economist at IHS Global Insight, said in a note to clients.
