Confident consumers brighten US outlook

A girl looks up at a toy sales display in a JC Penney store in New York. US consumer sentiment and spending both hit five-month highs heading into the end of the year, fostering hopes of a strong 2014.

Reuters, Bloomberg

Washington

US consumer sentiment and spending both hit five-month highs heading into the end of the year, the latest sign of sustained strength in the economy and fostering hopes of a strong 2014.

Consumer spending rose in November at the strongest pace since June and an upbeat sentiment reading for December suggests consumers will keep shopping despite tepid income growth.

“Next year is shaping up to be the better tomorrow we have wanted to see ever since the recession ended almost five years ago,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending rose 0.5% after gaining 0.4% in October, the Commerce Department said yesterday. The rise matched economists’ expectations and was the seventh consecutive month of increases in consumer spending, which accounts for more than two-thirds of US economic activity.

When adjusted for inflation, consumer spending also increased 0.5%, the largest rise since February 2012.

The data indicates that consumer spending in the last three months of 2013 probably accelerated from the third quarter’s 2% annual rate. Spending is being lifted by improving household balance sheets, thanks to a rising stock market and house prices.

A second report showed the Thomson Reuters/University Michigan’s overall index of consumer sentiment jumped to 82.5 this month, the highest reading since July. It improved from 75.1 in November and was unchanged from the preliminary reading released earlier this month.

US stocks touched all-time highs, while prices for US government debt slipped. The dollar fell against a basket of currencies.

The reports added to other fairly strong data, such as employment and industrial production, in suggesting the economy retained some of its third-quarter momentum in the lead-up to the end of the year and was poised for faster growth in 2014.

They also fit in with the Federal Reserve’s upbeat view on growth, which prompted the central bank to announce last week that it would start trimming its monthly bond purchases from January.

The US economy grew at a 4.1% clip in the July-September period, the fastest pace in nearly two years, after expanding at a 2.5% rate in the second quarter.

International Monetary Fund managing director Christine Lagarde said the international lender would raise its growth forecast for the world’s largest economy next year. The IMF forecast in October that the US economy would expand 2.6% in 2014.

“We see a lot more certainty for 2014,” Lagarde said in an interview broadcast on NBC’s “Meet the Press” on Friday. With the unemployment rate falling, the Fed’s action last week and the government budget agreement, “all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast,” she said.

Lagarde, 57, praised the Fed’s “very well communicated” plan. “What has been announced in terms of tapering is an indication that the central bank in the US has more trust, more confidence in the real economy picking up now,” she said.

The IMF chief also indicated support for the bipartisan budget passed last week that eases $63bn in automatic spending.

“Making sure that there is growth, that there is adequate redistribution through various systems, is important,” Lagarde said when asked about the minimum wage and income inequality. “There is a clear indication that rising inequality leads to less sustainable growth.”

Despite the signs of strength in the economy, inflation remains benign. A price index for consumer spending was unchanged for a second straight month.

Over the past 12 months, prices rose 0.9%. The index had gained 0.7% in October.

Excluding food and energy, the price index for consumer spending rose 0.1%, increasing by the same margin for a fifth straight month. Core prices were up 1.1% from a year ago.

Both inflation measures continue to trend below the Fed’s 2% target, which would suggest the US central bank could keep interest rates near zero for a while, even as it reduces its bond purchases.

“Stronger growth supports Fed tapering but modest inflation means the pace of tapering will be slow,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Personal income rose 0.2%, rebounding from a 0.1% dip in October. The increase was well below economists’ expectations for a 0.5% gain and partly reflected cuts in food stamps.

With spending outpacing income growth, the saving rate — the percentage of disposable income households are socking away — fell to a nine-month low of 4.2%.