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U.S. December Spending Rises 0.7%; Inflation Cools
(Bloomberg) -- Personal spending in the U.S. jumped in December by the most in five months and a measure of inflation watched by the Federal Reserve rose less than forecast.
The 0.7 percent rise in purchases followed a 0.5 percent increase in November, the Commerce Department said today in Washington. The Fed's preferred gauge of prices tied to spending rose 0.1 percent after no change.
The figures validate the decision by the Fed's Open Market Committee in June of last year to stop raising interest rates as they forecast economic growth to ``moderate'' and limit inflation. Job growth is fueling wage gains, allowing the economy to withstand a slowdown in housing and slower manufacturing growth.
``These data conform to the FOMC's forecast,'' said Steven Wood, president of Insight Economics in Danville, California. ``The consumer has shrugged off the effects of the correction in the housing market. Core consumer inflation has peaked and retreated modestly despite tightness in the labor market.''
Incomes increased 0.5 percent in December, the most in three months, after a 0.3 percent rise, today's release showed.
A separate report from the Labor Department showed initial jobless claims fell more than forecast last week. The number of people filing first-time claims for unemployment insurance declined by 20,000 to 307,000. Economists had forecast 315,000.
The smaller-than-forecast rise in inflation helped push down the yield on the Treasury's benchmark 10-year note by 1 basis point to 4.8 percent at 8:31 a.m. in New York.
Economists had forecast a 0.7 percent rise in spending after a previously reported 0.5 percent November increase, according to the median of 73 estimates in a Bloomberg News survey. Estimates ranged from gains of 0.3 percent to 1 percent.
Core Inflation
The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.1 percent in December after no change the previous month. The measure increased 2.2 percent from December 2005, also less than forecast.
Economists had forecast a 0.2 percent rise in core inflation from a month earlier, and a 2.3 percent gain compared with December 2005, according to the Bloomberg survey.
Adjusted for inflation, spending rose 0.3 percent in December, after rising 0.5 percent the prior month, the report showed.
The Fed and Inflation
Fed policy makers have said they would be comfortable with a 1 percent to 2 percent increase in the preferred measure over a 12-month period. Counting on the economy to expand at a ``moderate pace'' that will help damp inflation, they voted yesterday to keep the benchmark overnight lending rate at 5.25 percent.
``Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market,'' the Federal Open Market Committee said yesterday after meeting in Washington. Still, ``some inflation risks remain.''
Consumer spending, which accounts for more than two-thirds of the economy, increased at an annual rate of 4.4 percent last quarter, the most since the first three months of the year. The gain compared with a 2.8 percent pace in the third quarter and allowed the economy to grow at a 3.5 percent rate, Commerce Department figures showed yesterday.
Because the increase in spending was more than the gain in incomes, the savings rate worsened to minus 1.2 percent, from minus 1 percent the prior month. A negative rate suggests consumers are dipping into savings to maintain spending.
Lower Savings Rate
``Households can't keep spending more than their income indefinitoldy,'' said Bill Hampel, chief economist at the Credit Union National Association in Washington. The more the savings rate falls, ``the more headwind it creates for consumer spending in the future,'' Hampel said.
Disposable income, or the money left over after taxes, rose 0.5 percent, after a 0.3 percent rise the previous month. Adjusted for inflation, disposable income increased 0.2 percent.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 1.2 percent after rising 1.3 percent. Purchases of non-durable goods increased 0.6 percent after rising 1 percent. Spending on services, which account for almost 60 percent of all outlays, was unchanged.
Job growth is fueling the wage gains needed to sustain consumer spending. Employers added 167,000 workers to payrolls in December, and workers' average hourly earnings grew by the most in eight months, government data showed last month. January employment, to be reported tomorrow, probably increased 150,000, according to a Bloomberg survey. The unemployment rate may hold at 4.5 percent, close to a five-year low.
Cheaper Fuel
Cheaper gasoline also gave consumers the wherewithal to spend more on holiday gifts. The average price of regular unleaded gasoline in December was $2.31 a gallon, down from more than $3 a gallon in early August, according to the American Automobile Association.
Best Buy Co. and Circuit City Stores Inc., the largest U.S. electronics retailers, raised forecasts for the holiday quarter after Best Buy reported its biggest December sales gain in three years for stores open at least 14 months, while Circuit City's December same-store sales exceeded analysts' estimates. |
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