Dec. 22 (Bloomberg) -- Americans earned and spent more as the holiday season began, reinforcing the role consumers will play in extending the economic expansion to a sixth year.

Spending rose 0.5 percent in November, the most in four months, and incomes increased 0.3 percent for a second month, the Commerce Department said today in Washington. Consumers were also more confident than forecast in December, according to the University of Michigan. Separate government figures showed orders for durable goods, excluding transportation equipment, dropped last month.

Federal Reserve Chairman Ben S. Bernanke is counting on consumers to provide the impetus for a pickup in growth as manufacturing and housing slump. A measure of inflation was unchanged, backing signals from central bankers that interest rates will remain steady in coming months, while some traders predict a cut before June.

``Strong consumer spending and lower inflation is quite a gift for policy makers in this holiday season,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York. ``Growth has moderated, but it has not slowed in a worrisome manner.''

The reports bode well for the sales of retailers this holiday season. About 32 percent of the retail industry's profit and 27 percent of sales were derived in the last quarter of 2005, according to the International Council of Shopping Centers, a New York-based trade group.

Treasuries Drop

Bonds weakened after the reports. The yield on the benchmark 10-year Treasury note climbed 7 basis points to 4.62 percent at 2:08 p.m. in New York. The dollar rallied.

The Commerce Department's durable goods report suggested companies are hesitant about making equipment purchases. Orders rose 1.1 percent in November, reflecting a rise in demand for commercial aircraft and military materiel. Outside transportation, they fell 1.1 percent after a 1.6 percent decrease.

``Manufacturers are the ones showing a lack of confidence in the economy,'' said Stephen Gallagher, chief U.S. economist at Societe Generale SA in New York. ``Businesses are going to be very surprised at how resilient the consumer has been, and they're going to have to catch up with pretty strong production in the spring of 2007.''

Investment Proxy

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, fell 1.4 percent last month after dropping 3.9 percent in October. The back-to-back declines were the first since February-March 2005.

Economists had expected spending to rise 0.6 percent last month, after a previously reported 0.2 percent gain, according to the median of forecasts in a Bloomberg News survey. Personal income was forecast to rise 0.4 percent for a second month.

The University of Michigan's final index of sentiment fell to 91.7 from 92.1 in November. Economists predicted a reading of 90.2. The gauge has averaged 88.1 since monthly data were first compiled in 1978. Consumer spending accounts for about 70 percent of gross domestic product.

``What consumers told us in December was that the economy would not be as bad as they had thought earlier this month, and in some months before,'' Richard Curtin, director of the University's survey, said in an interview. ``The consumer will remain the engine of growth.''

Inflation Measure

The Commerce Department's price gauge, the personal consumption expenditure index, excluding food and energy costs, was unchanged after a 0.2 percent increase in October. Compared with November 2005, the price index closely watched by the Fed was up 2.2 percent, the smallest year-over-year gain since May.

Adjusted for inflation, spending rose 0.5 percent for a second month, today's report showed.

The savings rate fell to minus 1 percent, from minus 0.7 percent in October, because the gain in spending exceeded the rise in income. A negative rate suggests consumers are dipping into savings to maintain spending.

Disposable income, or the money left over after taxes, rose 0.3 percent after a 0.2 percent increase the month before.

Adjusted for inflation, disposable income increased 0.3 percent in November following a 0.4 percent rise.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 1.6 percent after rising 0.6 percent. Purchases of non-durable goods increased 1 percent after a 0.7 percent gain.

Still Shopping

Concerns about housing, which have weighed on consumer sentiment, have yet to stop Americans from shopping.

Retail sales in November rose 1 percent, more than economists had forecast, a government report Dec. 13 showed. Consumers took advantage of discounts offered by Best Buy Co., Circuit City Stores Inc. and Wal-Mart Stores Inc. to load up on electronics for the holidays. Sales at grocery and sporting- goods stores and restaurants also showed gains.

``I am very pleased with how the holidays are shaping up,'' Ed Schmults, chief executive officer of FAO Inc., parent of upscale toy retailer FAO Schwarz, said in an interview yesterday. ``We've just had a very strong season across all categories.'' The average transaction is 15 percent to 20 percent bigger than last year, he said.

The cooling in inflation pressures may help reassure Fed policy makers, who this month held their overnight lending rate unchanged at 5.25 percent for a fourth straight meeting. The core price index is starting to edge down toward the upper end of Bernanke's ``comfort'' range of 1 percent to 2 percent.

Growth Forecasts

Economists surveyed by Bloomberg News earlier this month expect the economy will grow at an annual rate of 2 percent this quarter, matching the third quarter's pace as the year's weakest. The economy will grow 2.4 percent next quarter, according to the survey median.

Economists in the survey estimated consumer spending would rise 3 percent this quarter after a 2.8 percent increase.

The slowing housing market is still a risk to consumer spending and economic growth, according to some economists. Homeowners took a net $379.8 billion out of home equity at an annual rate last quarter, down 56 percent from the record reached a year earlier and the least since the fourth quarter of 2003, according to calculations by Fed economists.

As that source of cash dries up, there are signs consumers may be waiting for bargains.

Retail sales last week rose at their slowest pace since mid-November as consumers delayed holiday shopping and mild weather limited sales of winter clothing, a report from the International Council of Shopping Centers and UBS Securities LLC showed.

Richmond, Virginia-based Circuit City, the second-biggest U.S. consumer-electronics retailer, this week reported its first loss in six quarters on lower prices for televisions and computers. Best Buy and Wal-Mart have also been reducing prices on home electronics to attract holiday shoppers.

To contact the reporter on this story: Joe Richter in Washington at jrichter1@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: December 22, 2006 14:54 EST