U.S. Economy: Consumer Spending Increased in December

Consumer spending in the U.S. rose more than forecast in December, giving the world’s largest economy a lift heading into 2011.

Purchases, which account for about 70 percent of the economy, increased 0.7 percent after climbing 0.3 percent the prior month, Commerce Department figures showed today in Washington. Another report showed businesses expanded in January at the fastest pace in two decades.

Rising incomes and a cut in payroll taxes this year will probably continue to drive household demand, benefiting companies from Coach Inc. to Ford Motor Co. Today’s spending report also showed the Federal Reserve’s preferred inflation gauge rose at the slowest pace on record, one reason policy makers are pushing ahead with a second round of monetary stimulus worth $600 billion.

“We ended the quarter on a firmer note,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who correctly forecast the gain in purchases. “We are going to see continued healthy spending in 2011. The inflation numbers are very tame. The Fed is going to stay right where they are.”

Stocks rose, extending the second straight monthly increase for the Standard & Poor 500 Index, after the reports and as Exxon Mobil Corp.’s profit beat estimates. The gauge climbed 0.8 percent to 1,286.12 at the 4 p.m. close in New York.

Purchasers Upbeat

The Institute for Supply Management-Chicago Inc. said today its business barometer rose this month to 68.8, the highest level since 1988. Figures greater than 50 signal expansion, and economists projected the gauge would slip to 64.5, based on the median estimate in a Bloomberg News survey.

The gain was led by measures of orders and employment as manufacturers, including Caterpillar Inc., benefited from the pickup in consumer purchases and stronger export markets in emerging economies like China.

“This fortifies the stability of the recovery,” said Maxwell Clarke, chief U.S. economist at IDEAglobal in New York. “You definitely see traction from manufacturing going forward.”

The median estimate of 67 economists surveyed by Bloomberg called for a 0.5 percent advance in spending. Projections ranged from increases of 0.2 percent to 0.8 percent.

The Commerce Department’s report also showed incomes increased 0.4 percent for a second month, matching the median forecast in the Bloomberg survey.

After-Tax Incomes

Disposable incomes, or the money left over after taxes, rose 0.1 percent after adjusting for inflation. They climbed 0.2 percent in the prior month.

After-tax income is likely to get a boost this month. The Obama administration and Congress agreed in December to extend Bush-era tax cuts, renew emergency jobless benefits for the long-term unemployed and reduce payroll taxes by 2 percentage- points.

Americans had to dip into savings last month to boost spending, showing the economic recovery needs to create more jobs to reduce unemployment. The savings rate decreased to 5.3 percent, the lowest level since March, from 5.5 percent the prior month.

Another report today showed the number of jobs advertised on the Internet climbed in January to the highest level in more than three years, indicating the labor market is improving.

Help-Wanted Ads

Online help-wanted ads climbed by 438,000 from the prior month to 4.27 million, the most since June 2007, according to the Conference Board. a New York-based private research group. Forty-nine states reported gains, led by California, Texas and New York.

Also today, results of a Fed survey of senior loan officers showed most banks expect fewer loans will become delinquent in 2011 and charge-off rates will improve. The poll also found that lending rules eased and demand for business credit increased in the fourth quarter from the previous three months.

The spending report showed that adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.4 percent after a 0.2 percent increase. The numbers provide a monthly breakdown of the quarterly figures released last week which showed purchases climbed at a 4.4 percent annual rate in the fourth quarter, the most since the first three months of 2006.

The economy grew at a 3.2 percent annual pace in the last three months of 2010, up from a 2.6 percent gain in the prior quarter.

Fed Price Outlook

Today’s report also showed inflation slowed further below the central bank’s long-term forecast. The Fed’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 0.7 percent from December 2009, the smallest advance since records began in 1959.

The central bank’s long-term goal is for inflation of 1.6 percent to 2 percent. The lack of price pressures is allowing the Fed to maintain quantitative easing to spur growth.

“Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” policy makers said in a statement on Jan. 26.

Retailers’ 2010 holiday sales jumped 5.5 percent for the best performance in five years, according to MasterCard Advisors’ SpendingPulse. Demand for clothing and jewelry helped sales at chains from Macy’s Inc. to Tiffany & Co.

“We feel great about the performance of the company, about how we’re heading into the first half of 2011,” Macy’s Chief Executive Officer Terry Lundgren said in a Bloomberg Television interview on Jan. 10.

Auto Sales

Demand for automobiles also drove spending. Car sales in December rose to a 12.53 million unit annual pace, the best since the government’s cash-for-clunkers program in August 2009, industry data showed.

Ford, the second-largest U.S. automaker, on Jan. 28 reported its U.S. sales climbed 15 percent in the fourth quarter and said profit-sharing checks for its 40,600 U.S. hourly workers will average $5,000, the highest since 2000.

Demand from affluent Americans helped profit at Coach, the largest U.S. maker of luxury leather handbags, jump 26 percent in the second quarter. The New York-based chain introduced new bags more frequently in the holiday season, and North America same-store sales were “exceptional,” Chief Executive Officer Lew Frankfort said in a Jan 25 statement.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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