Americans increased their spending in November by the most in five months, and their income edged up modestly.
Consumer spending rose 0.5 percent from October, when spending had risen 0.4 percent, the Commerce Department said Monday. It was the best showing since June. The gain was driven by a jump in spending on long-lasting durable goods, such as autos.
Consumer income rose 0.2 percent, an improvement from a 0.1 percent decline in October. Wages and salaries, the most important components of income, rose a solid 0.4 percent. That gain reflected strength in the private sector and a modest gain in government pay.
Consumer spending is closely followed, because it accounts for about 70 percent of economic activity. The strong November showing suggests solid economic growth this quarter.
Steady hiring and modest wage gains have boosted consumer confidence and given Americans more money to spend. At the same time, higher stock and home prices have driven up household wealth and made some people more comfortable about spending.
The big rise in spending and smaller income gain meant that the personal saving rate slipped a bit, to 4.2 percent of after-tax income in November. That was down from 4.5 percent in October.
An inflation gauge tied to consumer spending, closely followed by the Federal Reserve, showed that inflation is still running well below the Fed’s target. Prices were unchanged in November, and have risen just 0.9 percent over the past 12 months. The Fed’s target for annual inflation is 2 percent.
The economy, as measured by the gross domestic product, grew at an annual rate of 4.1 percent in the July-September quarter, the government said Friday in its third and final estimate. The government’s figure was up from its previous estimate of a 3.6 percent annual growth rate for the third quarter. Nearly all of the upward revision reflected faster spending for consumers, a possible sign of momentum entering the final three months of the year.
The 4.1 percent growth rate in the third quarter was the best performance in nearly two years. It was only the second time since the economic recovery began, in mid-2009, that annual growth in any quarter has topped 4 percent.
Economists caution that growth will likely slow in the October-December period. That’s because two-fifths of last quarter’s gain came from an unusually large buildup in business stockpiles — something not likely to be repeated this quarter.
But analysts were encouraged by the recent acceleration in spending, and say rising job growth could fuel more spending in the coming months. Many analysts believe the economy’s annual growth rate will slow to between 2 percent and 2.5 percent this quarter, because of the expected drag from slower stockpiling. But some said the better-than-expected spending could mean more strength than expected, and a stronger start to 2014.
“Consumers are spending at the fastest rate, this quarter, than any time since 2010,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. “With numbers like these, tomorrow is shaping up to be the better tomorrow we have wanted to see, ever since the recession ended almost five years ago.”
President Barack Obama took note last week of the encouraging reports, including four straight months of solid job gains. That spurt of hiring has helped lower the unemployment rate to 7 percent, a five-year low.
The drag from higher taxes and across-the-board spending cuts has shaved an estimated 1.5 percentage points from economic growth this year, which analysts think will be around 1.8 percent. But the effects will lessen next year, something economists note in their forecasts for around 2.5 percent growth, or better, in 2014.
A stronger outlook for the economy and job market led the Fed last week to begin winding down its bond-buying program. The Fed’s bond purchases have been intended to lower long-term interest rates and encourage more borrowing and spending.
The Fed said that it would begin reducing its $85 billion-a-month in bond purchases by $10 billion in January. Chairman Ben Bernanke said that if the economy keeps improving, the bond purchases could be trimmed by similar amounts at coming meetings.
Jennifer Lee, senior economist at BMO Capital Markets, said the stronger spending in October and November validates the Fed’s decision to pare its bond purchases, and should boost growth this quarter. At the same time, tepid inflation allows the Fed to make only modest reductions in its bond purchases, without fear of igniting price increases.