U.S. Economy: Spending Increased More Than Forecast (Update2)

Dec. 21 -- Consumer spending in the U.S. rose more than forecast in November, allaying concern that the slowest shopping season in five years may have already pushed the economy into recession.

Purchases gained 1.1 percent after a 0.4 percent increase in October that was more than previously estimated, the Commerce Department said today in Washington. Incomes also advanced, while the Federal Reserve's preferred measure of inflation accelerated, the report showed.

While the gain in November spending was the biggest in more than two years, it preceded reports by Circuit City Stores Inc., Best Buy Co. and other retailers that warned of a slump in purchases. A private report today showed consumer confidence slid to the lowest level in more than two years in December.

``The tone of the fourth quarter looks to be weak, but not nearly by enough to threaten imminent recession,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, who previously worked at the Fed's Richmond branch.

Economists forecast spending would rise 0.7 percent, after an originally reported 0.2 percent increase in October, according to the median of 73 estimates in a Bloomberg News survey. The November increase was the biggest since July 2005.

Treasuries slipped, sending the 10-year note yield up to 4.17 percent at 4:37 p.m. in New York, from 4.05 percent late yesterday. The Dow Jones Industrial Average rose 205 points, or 1.6 percent, to close at 13,450.65.

Confidence Falls

The Reuters/University of Michigan final index of consumer sentiment for December dropped to 75.5, the lowest since October 2005, from 76.1 last month. The gauge has averaged 88 since monthly data were first compiled in 1978.

Weekly surveys suggest the November spending boom may not be sustained. Holiday sales declined in the seven days ended Dec. 15 for the third straight week, according to ShopperTrak RCT Corp. This year's holiday season may be the weakest since 2002, according to the National Retail Federation.

Circuit City, the second-largest U.S. consumer-electronics retailer, said its third-quarter loss widened to $207.3 million, or $1.26 a share, from a loss of $20.4 million, or 12 cents, a year earlier. Sales dropped 3.1 percent to $2.94 billion, the Richmond, Virginia-based company said today in a statement.

December has had ``a little slower start to the season than we had hoped,'' Brad Anderson, chief executive officer of Best Buy, the largest U.S. consumer-electronics retailer, said in a Dec. 18 interview.

Incomes Gain

Incomes rose 0.4 percent after a 0.2 percent increase the prior month, today's Commerce report showed. Personal income was forecast to rise 0.5 percent, according to the survey median.

The advance in sales last month, and a higher estimate for October purchases than previously reported, indicates the economy won't contract this quarter as some analysts had predicted.

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in an interview with the Financial Times published yesterday that ``if I had to be bold I'd say we began a recession in December.''

Gross's office said he wasn't available for a comment.

Today's figures suggest ``we can postpone fears of a recession at least until next year,'' said Ryan Reed, an economist at National City Corp. in Cleveland, who forecast a 1 percent gain in spending. ``With the headwinds that the consumer is currently dealing with, spending gains of this size are unsustainable going into the new year.''

The earliest Thanksgiving holiday since 2001 may have pushed more purchases of Christmas gifts into November, suggesting sales this month will suffer, economists said. The day after Thanksgiving is considered the traditional start of the holiday-shopping season.

Inflation Accelerates

The inflation measure tracked by the Fed rose 0.2 percent for a second month. It was up 2.2 percent from November 2006, the biggest year-over-year gain since March, compared with the 2 percent median estimate in the Bloomberg survey.

Adjusted for inflation, spending increased 0.5 percent, the most this year, after a 0.1 percent increase the prior month, the report showed.

Because the increase in spending was larger than the gain in incomes, the savings rate dropped to minus 0.5 percent, the lowest since August 2005, from 0.3 percent the prior month. A negative rate suggests consumers are drawing down savings to maintain spending.

Inflation's Bite

Disposable income, or the money left over after taxes, rose 0.3 percent. Adjusted for inflation, disposable income decreased 0.3 percent.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 0.6 percent after falling 0.1 percent. Purchases of non-durable goods also increased 0.6 percent and spending on services, which account for almost 60 percent of all outlays, rose 0.5 percent.

The job market may be one bright spot for Americans, as the housing recession extends into 2008 and the subprime mortgage crisis makes borrowing tougher. Payrolls rose by 94,000 in November and the jobless rate was unchanged at 4.7 percent for a third month, the Labor Department said this month.

Some merchants took matters into their own hands last month to stimulate sales. Bentonville, Arkansas-based Wal-Mart Stores Inc., the world's largest retailer, said November sales rose within the company's forecast as shoppers stocked up on holiday food and gifts. Wal-Mart increased post-Thanksgiving discounts to lure shoppers into its stores early in the season.