How are consumers paying for more spending? MoneyWatch/ October 18, 2012, 6:55 AM (Moneywatch) The recent spate of positive economic news, including rising housing starts, retail sales and consumer spending, obscures a key question for the U.S. economy: How are consumers paying for it? Three studies by economists suggest that the renewed flow of money toward, say, residential construction and car sales, are coming from wages. If true, that could suggest the economy is doing slightly better than previously thought. Certainly, there's little doubt that something good is happening to the economy. Home construction rose a whopping 15 percent last month, while the number of housing permits issued rose 11.6 percent. In another positive sign, retail sales jumped 1.1 percent in September, while August numbers were revised up to 1.2 percent, from 0.9 percent. These gains reflect increased consumer optimism. A poll released last week showed the consumer-sentiment index for early October was at its highest reading since before the Great Recession took hold following the 2008 financial crisis. The improved mood and spending are unusual because they aren't the result of increases in jobs and wages. Although the labor market is improving, unemployment remains high at 7.8 percent. Median household income is about $50,000, the lowest it has been since 1996. This is due in part to laid-off middle-income workers accepting as much a 20 percent pay cut when they get a new job, according to an Urban Institute study. In 2004 after the dot-com crash, employees were taking far smaller cuts. So where is the money behind all this consumer spending coming from? Credit cards might seem like the most likely suspect, but this time plastic isn't to blame. Household debt as a share of disposable income sank to 113 percent in the second quarter, suggesting that people aren't returning to the kind of credit-fueled consumption that coincided with the housing bubble. That's down from the record high of 134 percent in 2007, just before the meltdown. Debt payments on that basis are the lowest in almost 18 years. In turn, the credit card default rate, which had soared above 9 percent in 2010, has dropped to 3.75 percent. In truth, the answer may be that the money has been there all along -- we didn't know it. Indeed, while some commentators hinted at a conspiracy when last month's job numbers came out better than expected, two studies of tax-withholding data indicate the government's job and income figures are actually too pessimistic. Jim O'Sullivan, chief U.S. economist at High Frequency Economics, and Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research, conducted separate studies of U.S. tax withholding data that both found something surprising. Looking at withholdings over two-month periods, Schnapp said that the Bureau of Economic Analysis's methodology for measuring economic activity undercounts growth when the economy shifts gears, whether speeding up or decelerating. She found that yearly withholding growth has increased by 2.1 percentage points since June, hitting 5.1 percent in the August-September period. However, BEA has reported withholding growth as being only around 3.5 percent. O'Sullivan studied a longer 13-week average of withholdings and found employment-based income is rising 4.5 percent over the past year. One other source of this increase could be the result of how the government counts part-time workers. The federal Bureau of Labor Statistics defines a part-time job as anything less than 35 hours per week. Using that measure, part-timers currently make up about 20 percent of the workforce, the highest it has been in 30 years. However, Paul Dales of Capital Economics compared that number against data from the Organization for Economic Co-operation and Development, which defines a part-time worker as someone who works 30 hours or less per week. That analysis showed more people working more hours, and therefore earning more money, than the BLS numbers did. Dales writes in a recent report: If those additional part-timers are now working 20 hours a week compared with 40 hours previously, their annual income will have halved to $24,500. That's a total "loss" of pre-tax income of $83 billion, or 0.5 percent of GDP. If the majority of the ... workers who are working part-time for economic reasons are doing 34-hour weeks rather than 40-hour weeks, then the "lost" earnings may amount to only $25 billion, or 0.2 percent of GDP. That means there could be $58 billion more in consumers' wallets than previously thought. That might not be enough to account for all the increased spending, but it would certainly be a significant contributor. This also suggests that there are fewer part-time workers than previously thought. According to the OECD data, then, the share of part-timers (working less than 30 hours per week) is around the 12.6 percent -- the same level it was at in 2007.