Mixed bag of news for sluggish economy

At the start of the critical holiday shopping season, the economy received a dose of mixed news Wednesday.

Consumers barely increased their spending in October, and businesses pulled back on investment in long-lasting manufactured goods. Still, Americans' pay rose by the most in seven months, a sign they may spend more in coming weeks.

Some economists were discouraged by the data, especially after a separate recent report showed Americans spent more on retail goods in October for the fifth straight month.

Paul Dales, a senior U.S. economist with Capital Economics, said the slower consumer spending growth and decline in business investment suggest economic growth in the October-December quarter could be weaker than first thought. He now expects just 2.5 percent growth, instead of 3 percent.

Consumer spending increased 0.1 percent last month, the Commerce Department said. It was the poorest gain in four months. Yet people continued to spend more on cars and electronics, analysts noted. Spending on longer-lasting goods rose a solid 0.8 percent.

People cut back on nondurable purchases, such as clothing and food. And spending on services, which represent two-thirds of consumer spending, barely grew. That led many analysts to speculate that consumers might be giving up vacations and eating out less because of the weak economy.

"Today's report was a good reminder that much of what consumers spend their money on is not purchased at the shopping mall, but is rather spent on their homes and on their health," said James Marple, senior economist at TD Economics. "With services spending making up 65 percent of total consumption expenditures, the poor performance here more than made up for the continued gains in spending on goods."

Perhaps the best news in the report was that Americans earned more in October after five straight months of paltry pay increases. Income rose 0.4 percent last month, the best showing since March. Private wages and salaries drove the gain.

Many Americans chose to save the extra money. The savings rate ticked up to 3.5 percent of after-tax incomes from 3.3 percent in September -- the lowest level since the recession started in December 2007.

Some economists had predicted consumer spending would slow because Americans spent more over the summer while earning less. Consumer spending makes up 70 percent of economic activity.