Consumer Spending Gains Lift Fourth-Quarter Growth: Economy

Consumer spending rose in November by the most in five months as discounts lured early holiday shoppers, giving the U.S. economy a boost at the end of 2013.

Purchases increased 0.5 percent after a 0.4 percent gain in October that was larger than previously estimated, the Commerce Department reported today in Washington. Other data showed consumer sentiment climbed in December to a five-month high.

Record stock prices and a rebound in home values are boosting wealth among upper-income Americans, benefiting retailers such as Neiman Marcus Group LLC. At the same time, the job market is strengthening, which means spending advances will become more broad-based, enabling the world’s largest economy to pick up in 2014.

“Jobs are growing, confidence is growing, households and asset values are climbing,” said Paul Edelstein, director of financial economics at IHS Global Insight Inc. in Lexington, Massachusetts, who correctly projected the gain in spending. “There appears to be some sort of gathering momentum in the economy.”

Stocks rose, with benchmark indexes extending all-time highs, as Apple Inc. rallied. The Standard & Poor’s 500 Index climbed 0.5 percent to 1,827.99 at the close in New York.

The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 82.5 from 75.1 in November. That matched the preliminary reading issued earlier this month.

The survey showed a pickup in buying plans because of retailer discounting and more favorable views of the economy. Consumers’ attitudes toward the purchase of homes, cars and other durable goods improved along with their finances, according to the report.

Expansion Strengthening

“Moods are getting better and we’re starting to see consumers get a little more active,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who correctly predicted the confidence index. “We may have a chance to see one of the best quarters for spending so far in this expansion.”

Tracking estimates from economists at Morgan Stanley and RBS Securities Inc. in New York were among those that showed spending climbing at about a 4 percent annualized pace so far this quarter. That would mark the biggest gain in three years.

The report follows data last week that showed stronger momentum in economic growth as households stepped up spending. Third-quarter gross domestic product expanded at a 4.1 percent pace, the most in almost two years, the Commerce Department reported last week. Consumer purchases, which account for almost 70 percent of the economy, increased 2 percent, more than the previously reported 1.4 percent.

Survey Results

The increase in spending last month matched the median forecast of 76 economists in a Bloomberg survey. Projections ranged from gains of 0.2 percent to 0.7 percent. October’s reading previously was reported as an increase of 0.3 percent.

The one soft spot was incomes, which climbed 0.2 percent in December, short of the 0.5 percent increase projected by economists surveyed. The shortfall reflected a slump in earnings by farmers as commodity prices dropped last month rather than flagging worker pay, according to the Commerce Department.

An improving job market is helping sustain spending. Wages and salaries rose 0.4 percent in November following a 0.1 percent increase the prior month.

Payrolls expanded by 203,000 workers in November after a 200,000 gain in October, and the jobless rate fell to a five-year low of 7 percent, according to Labor Department figures.

Fed Policy

The improvement in the economy and job market helps explain the Federal Reserve’s decision to begin reducing stimulus last week. The central bank said Dec. 18 it will trim monthly bond purchases to $75 billion from $85 billion starting in January.

After adjusting for inflation, purchases also climbed 0.5 percent in November, the biggest gain since February 2012, after a 0.4 percent increase the prior month, today’s Commerce report showed. That was the best back-to-back performance since the early months of the current expansion in 2009.

Household outlays on services rose 0.4 percent in November after adjusting for inflation, the biggest gain since March. The category includes utilities, tourism, legal help, and health care. Spending on durable goods including cars increased 2.2 percent, the most in a year, while purchases of non-durable goods, including gasoline, were little changed.

Holiday Spending

Neiman Marcus Chief Executive Officer Karen Katz said the feedback from the Dallas-based retailer’s sales staff was that shoppers are spending this holiday season, and the most affluent consumers are “feeling good” about their finances.

“We are in constant communication with our sellers, they’re telling us that they’re just feeling like the customers are coming in really ready to shop,” Katz said on a Dec. 18 earnings call with analysts. “If we offer them kind of unique merchandise, really regardless of the category, they’re really open to spending money.”

Today’s spending report also showed inflation remained tame. The price index tracked by Fed policy makers was unchanged in November from the prior month and rose 0.9 percent from the same month last year. The central bank’s goal is for prices to rise about 2 percent a year.

Core prices, which exclude the volatile food and fuel categories, increased 0.1 percent from November and advanced 1.1 percent from the same month in 2012.

Because incomes rose less than spending, the saving rate dropped to 4.2 percent last month, the lowest since February, from 4.5 percent.

“The good news for many American households is that wage and salary gains have been outpacing consumer price increases since August, giving consumers some pricing power,” Chris Christopher, director of consumer economics at IHS Global Insight, said in a research note. “Consumer spending growth is likely to pick up in 2014 as the housing market, job prospects, and consumer mood make further gains.”

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