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Retail Sales Prompt Economists to Raise U.S. Spending Forecasts

A bigger-than-projected gain in November U.S. retail sales combined with revisions showing even larger increases in prior months prompted economists to boost estimates for fourth-quarter consumer spending.

“The November retail sales report was solid all around,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note to clients. “Consumer spending appears to be getting a lift from higher equity prices, a gradually improving labor market, and a marginal firming in consumer sentiment.” Purchases will climb at a 4 percent annual pace this quarter, he said, up from a previous estimate of 2.5 percent.

The revisions come on top of earlier improvements to the 2011 outlook based on the tax compromise reached by President Barack Obama and congressional Republicans earlier this month. The world’s largest economy is gaining speed just as Federal Reserve policy makers meet today to discuss how to spur gross domestic product and prevent prices from falling.

“Our GDP model has been rather busy over the last week,” Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, said in a note to clients. “The tax cuts announced last week bumped our estimate for next year significantly higher and now it seems the handoff to 2011 is going to be better too.” Porcelli raised his forecast for spending this quarter to 3.4 percent from 2.9 percent.

Retail Sales

Sales at retailers increased 0.8 percent in November after a 1.7 percent jump in October that was larger than previously estimated, Commerce Department figures showed today. Excluding autos, gasoline and building materials, which are the figures used to calculate growth, purchases climbed 0.9 percent, the most since August.

Economists at Morgan Stanley in New York raised their tracking estimate for consumer spending this quarter to 3.5 percent from 3 percent following the report. As a result, they said the economy will expand at a 4.4 percent pace this quarter, the best performance in a year.

“The consumer is starting to benefit from a pickup in income growth tied to accelerating job gains, plummeting debt service and a modest improvement in household wealth,” David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist, wrote in a note to clients.

The Senate yesterday advanced the $858 billion agreement between President Obama and Republican lawmakers that would extend Bush-era tax cuts for two years and also keep emergency unemployment benefits in place in 2011. The 83-15 vote had widespread support from members of both political parties and Senate passage may come as early as today.

Tax Compromise

In addition, the legislation will cut payroll taxes by 2 percentage points during 2011 and let companies write off 100 percent of their capital investments through next year.

The reduction in taxes will boost spending power by about $110 billion next year, according to Greenlaw’s forecast.

“We think the strength in the consumer can be sustained,” wrote JPMorgan’s Feroli. “Last week we revised up first half 2011 consumption growth on the expectation that the tax compromise goes through, boosting disposable income and spending. In part because of this, we look for first-half GDP growth that is as good or better than the fourth-quarter outcome.”

Feroli projected the U.S. economy will grow at a 3.5 percent pace from October through December, up from a prior estimate of 2.5 percent.

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