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Consumer Spending Slows As Incomes Increase

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In this Jan. 31, 2011 photo, Bank of America customers use ATM machines in New York. The third quarter earnings that banks have reported, Tuesday, Oct. 18, 2011, show that they are struggling to make money the old fashioned way, by lending to consumers and businesses, when interest rates are at historic lows. New rules have stunted the banks' ability to collect certain kinds of fees like checking account overdrafts and late credit card payments, so they're making up for it with new charges like | AP

As Americans pay down their household debt, their reluctance to spend is hurting the economic recovery.

Though disposable personal income rose 0.3 percent in October -- a significant increase compared to the summer months, when incomes remained relatively stagnant -- Americans increased their spending by just 0.1 percent, according to data released Wednesday by the Commerce Department. In September, meanwhile, spending increased by 0.7 percent. The downward trend suggests that as Americans seek to pay down their overhang of household debt, they remain wary about spending beyond their means.

Meanwhile, Americans stashed away more of their money in their savings accounts in October. The personal savings rate was 3.5 percent of personal disposable income in October, compared to 3.3 percent in September.

As consumers hold on to their extra income, they are unlikely to provide much of a boost to an economy in desperate need of growth. Consumer spending comprises about 70 percent of the U.S. economy; as long as consumers do not spend, businesses are reluctant to hire more workers, so incomes remain relatively stagnant, providing more of an incentive for Americans to save. With the unemployment rate elevated at 9.0 percent, it is unclear what will break the negative cycle.

Though consumers will probably spend more in anticipation of the holidays, that uptick will likely be temporary, according to some economists.

Since incomes remain unsteady, consumer spending will remain shaky in the months to come, Wells Fargo Securities wrote in a report on Wednesday. Wells Fargo predicted that total income from government jobs will fall in the next year as the government slashes spending, and it expressed doubt as to whether the private sector will be willing to make up for those income and job losses.

"We believe that the saving rate is going to continue to increase during 'normal' months while decreasing again during the holidays, school and vacations seasons as U.S. households continue to rebuild their lost wealth due to the Great Recession and the drop in the price of their homes," Eugenio J. Alemán, senior economist at Wells Fargo Securities, wrote in the report.

Chris Christopher, senior principal economist at IHS Global Insight, wrote in a research note that though spending will rise during the holidays as consumers "find good deals," since consumer confidence remains low, "they will not be very cheerful."

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