Bit of encouraging economic news

WASHINGTON – Providing more evidence that the U.S. economy has turned a corner, personal income grew in November at the fastest rate in six months and is poised to accelerate in 2010, according to new government and private reports.

After plunging early this year, total personal income rose 0.4 percent last month, marking the fifth straight monthly advance, the Commerce Department said Wednesday. The gain was all the more notable because it came as the economy continued to lose jobs.

But the increase was relatively modest compared with income gains before the recession that began two years ago, and income growth could remain weak next year. In addition, with persistently high unemployment and continued uneasiness about the economy, Americans are saving much more of their after-tax income than they have for some time.

As a result, consumer spending and the economy as a whole are likely to remain lackluster for some time, in the view of many economists.

“It is encouraging that income appears to be growing at a steady pace,” Paul Dales, an economist at the research firm Capital Economics, in a research note. “But income growth of less than 2 percent will not be enough to drive a significant recovery in consumption. … We fear that the economic recovery will fade in the second half of next year.”

Part of the latest increase in personal income stemmed from growth in hours worked, rather than higher rates of pay. Although most workers might prefer the latter, increased hours are usually a leading indicator of a strengthening job market and overall economy. That’s because employers tend to increase the hours – and thus the paychecks – of existing workers before adding new names to their payrolls.

Separate Commerce Department figures released Wednesday showed new-home sales plunged last month, and with federal stimulus programs fading next year, many analysts are wondering what will propel an economy that has relied on consumer spending for about 70 percent of its activity.

“There’s so much uncertainty out there,” said Loree Griffith, a principal at Mercer, a human resources consulting firm.

Although fewer large businesses are planning to freeze wages next year – 14 percent compared with 30 percent in 2009 – employers are budgeting pay raises averaging just 2.3 percent in 2010, up only fractionally from 2.1 percent a year earlier, according to Mercer’s annual survey of employee compensation.

That’s barely enough to keep up with inflation and pales next to the 4 percent or so annual salary increases in most of this decade.

The U.S. personal savings rate – the amount of after-tax income that’s socked away – continued to hover at nearly 5 percent in November, a sharp increase from the 1 percent to 2 percent average annual rate in the several years before the recession wiped out many people’s jobs and personal wealth. Some economists see the savings rate climbing even higher, to as much as 8 percent – a level not seen for decades.

Earlier this decade, savings nose-dived as Americans with easy access to credit ramped up their spending.

Now consumers are saving more because of job insecurities and the need to pay off debts.

Over the long haul, greater savings should translate into more investment, which would ultimately help the economy. In the near term, however, higher savings would very likely curb economic growth by keeping consumer spending sluggish.