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Consumer spending flat in August: Jobless claims rise over hurricanes

| Friday, Oct. 1, 2004

WASHINGTON (AP) -- Consumers were tightfisted with their money amid soaring gasoline costs in August and hurricane-related disruptions last week sent applications for jobless benefits to their highest level in seven months.

Overall spending was flat in August, the Commerce Department reported Thursday. But July's increase in consumer spending was 1.1 percent, higher than the 0.8 percent initially reported, as consumers overcame their worries about energy costs and a sluggish jobs market.

Americans' income, the fuel for future economic growth, increased by 0.4 percent in August following a 0.2 percent rise the previous month. August's showing was the highest since May, which recorded a 0.5 percent increase. The spending and income figures are not adjusted for price changes.

In a separate report, the number of U.S. workers filing first-time applications for unemployment benefits rose by 18,000 to a seasonally adjusted 369,000 for the week that ended Sept. 25, the Labor Department reported. That marked the highest level since the week of Feb. 7.

A Labor Department statistician said the increase was caused by hurricanes Charley, Frances and Ivan. Jobless claims have risen in five of the six weeks since the hurricanes began to strike Florida in mid-August. The four-week average of claims, as a result, has moved steadily higher. Last week it stood at 343,500 -- a two-month high.

On Wall Street, stocks were mixed on the weak economic news and an announcement by Merck & Co. that it would remove its best-selling arthritis drug Vioxx from the market. The Dow closed down nearly 56 points, but the Nasdaq was up almost 3 points.

All eyes are on the economy with a presidential election just weeks away. President Bush says his three major tax cuts have lifted the country out of recession, and are responsible for strong economic growth.

But Democratic challenger John Kerry has said the tax cuts benefited wealthy people at the expense of everyone else, and failed to generate the millions of jobs Bush promised. There are 913,000 fewer jobs than when Bush took office in January 2001.

Consumers appear to be tapped out on spending for now, economists say. Business investments will be counted on to charge the economy, which grew at a 3.3 percent annual rate in the second quarter, up from initial estimates of 2.8 percent.

"The economic baton has passed from consumers to businesses," said Sung Won Sohn, economist at Wells Fargo & Co.

The price of crude oil topped the $50-per-barrel mark earlier this week, a record in dollar terms, but has since dropped. Analysts see surging oil prices as a major threat to economic expansion because the more consumers spend on energy, the less they have to spend on other goods. That was evident in August.

"The consumer spending spree is over," Sohn said.

Consumer spending on durable goods, such as cars, fell by 1.6 percent in August after soaring by 6.2 percent the previous month. Spending on nondurables, such as food, rose by 0.2 percent following a 0.3 percent rise in July. Spending on services grew 0.2 percent after a 0.5 percent rise in July.

High energy prices, violence in Iraq, concerns about terrorism, a sluggish jobs market and the election "have become a wedge between consumer spending and healthy economic fundamentals," Sohn said.

But the good news is that incomes are rising.

"Even though consumers are not spending, they have income," he said. "When income goes up, Americans tend to spend."

Federal Reserve Chairman Alan Greenspan has said there was an early summer slowdown of the economy, which he has called a "soft patch," but predicts the economy will rebound. The Fed raised interest rates last week for the third time since June. But some private economists worry his forecast might be overly optimistic given a renewed surge in energy costs.

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