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Good news raises hopes recovery won't fizzle

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JEANNINE AVERSA | November 25, 2009 05:53 PM EST | AP

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WASHINGTON — A flurry of good news this week – including falling jobless claims, stronger consumer spending and higher new-home sales – suggests the economic rebound, modest though it is, might just be here to stay.

While analysts caution that the recovery will be too sluggish to stop the unemployment rate from rising, the reports are at least encouraging enough to calm fears of a dreaded "double-dip" recession.

"This recovery continues to trudge ahead," said economist Ken Mayland, president of ClearView Economics. "It is not a gallop. But it is still forward movement."

Looked at together, the reports the government issued Wednesday signaled that the final quarter of 2009 at least got off to a decent start. And holiday sales should be slightly better than last year's figures, which were the worst since at least 1969.

The number of newly laid-off workers filing applications for unemployment aid fell by 35,000 last week to 466,000, the Labor Department said. It marked the fewest new filings since September of last year.

Jobless claims would still have to drop to near 400,000 for several weeks to signal actual growth in employment. Companies have slowed the pace of layoffs, but most aren't ready to ramp up hiring.

Another report showed that Americans stepped up their shopping in October. Consumer spending rose 0.7 percent, after a 0.6 percent drop in September, the Commerce Department said.

It was the best showing since a 1.3 percent jump in August, when the government's since-ended Cash for Clunkers rebate program enticed people to buy cars.

The rebound in spending shows that consumer spending – which powers 70 percent of the economy's activity – is managing to hold up despite tight credit, high debt levels and an unemployment rate above 10 percent.

Spending on costly manufactured goods, such as cars and appliances, led the way in October. Americans also spent more on gas, food, clothes and services.

Incomes, the fuel for future spending, rose 0.2 percent for the second straight month. But that gain came from bonuses and other benefits, interest and other kinds of income. Wages and salaries were flat.

With spending rising faster than incomes are, Americans' personal savings rate – how much they put away as a percentage of after-tax income – dipped to 4.4 percent in October from 4.6 percent in September.

Despite the sudden burst in spending, analysts predict it won't be nearly as energetic the rest of this quarter. And concerns remain that spending will slow early next year.

With Treasury rates at record lows, people who rely on interest from savings, such as money in certificates of deposit, have been watching their income fall for months. That's raised doubts about their ability to sustain their spending.

"We should not expect people to start 'shopping till they drop' again," said economist Joel Naroff, president of Naroff Economic Advisors.

Most of all, rising joblessness will likely weigh on shoppers. The nation's unemployment rate, now at a 26-year high of 10.2 percent, is expected to keep climbing into 2010.

Under some projections, it could rise as high as 11 percent by the middle of the year. Federal Reserve officials think the unemployment rate could stay elevated for several years, according to documents released Tuesday.

"The good news eases worries about a relapse, but it has to be taken with a bit of caution," said Oscar Gonzalez, economist at John Hancock. "The labor market remains quite weak. That, to me, is what will really affect how consumers behave in the coming months and how the recovery fares."

The economy has lost 7.3 million jobs since the recession started in December 2007 and is expected to lose 145,000 more in November. It would have to add 125,000 jobs a month just to keep the unemployment rate from rising.

Some optimism was raised by a separate report Wednesday that sales of new homes rose last month to the highest level in more than a year. All the strength came from a big increase in sales in the South. Sales in all other regions dropped.

In addition, many buyers last month rushed in because of uncertainty over whether Congress would extend a special tax credit of up to $8,000 for people buying their first home. Earlier this month, lawmakers did extend the credit – and expanded it to some existing homeowners, too.

There's still reason for caution. Orders for costly manufactured goods fell unexpectedly last month. Much of the weakness came from a big drop for goods related to defense. Excluding those, orders for other types of manufactured goods rose slightly – by 0.4 percent.

Orders for electrical equipment, appliances, commercial airplanes, parts and metals all rose last month. Orders for cars, machinery, computers and communications equipment fell.

Surveying all the economic barometers, "I don't see how you get anything other than a slow recovery," said Mark Vitner, economist at Wells Fargo. "It's still a pretty dicey environment."

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AP Business Writers Martin Crutsinger and Alan Zibel in Washington and Anne D'Innocenzio in New York contributed to this report.