Consumer Spending Up in December, Confidence Slips This Month

consumer spending december
Spencer Platt/Getty Images
By Lucia Mutikani

WASHINGTON -- U.S. consumer spending rose in December, but an ebb in consumer confidence and signs of cooling in factory activity this month suggested economic growth could moderate in the first quarter.

The Commerce Department said Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent after advancing 0.6 percent in November.

Last month's rise beat economist expectations for a 0.2 percent gain.

While December's increase provided a firmer base for first-quarter spending, weak income growth could erode momentum. Income was flat after rising 0.2 percent in November.

"The inability of income growth to keep pace with the increase in consumer expenditure places the sustainability of recent expenditure-driven economic growth into question," said Gennadiy Goldberg, an economist at TD Securities in New York.

"In fact, stagnant income growth and dwindling savings could lead consumers to moderate some of their spending plans in the months ahead, weighing on growth in early 2014."

Separately, the Thomson Reuters/University of Michigan's consumer sentiment index slipped to 81.2 in January from 82.5 in December. Confidence was down among households with annual incomes below $75,000.

Consumer spending recorded its strongest gain in three years in the fourth quarter, helping to lift the economy to a 3.2 percent annual growth rate during that period.

In another report, the Institute for Supply Management-Chicago business barometer fell to 59.6 from 60.8 in December. A measure of factory employment in the U.S. Midwest contracted for the first time in nine months, while deliveries to suppliers fell.

However, production, new orders and order backlogs increased slightly after falling in the prior two months.

Weak Income a Worry

The reports had little impact on U.S. financial markets, which took their cue from a weak inflation report from the eurozone, an ongoing emerging markets sell-off and disappointing corporate earnings.

U.S. Treasury prices gained while equities dropped sharply.

Income is being held back by stagnant wage growth as the economy works through slack in the labor market.

But there are signs that wage growth could be on the brink of acceleration. In a fourth report, the Labor Department said wages and salaries increased 0.6 percent in the fourth quarter, the biggest jump since the third quarter of 2009.

It followed a 0.3 percent advance in the third quarter. Wages and salaries account for 70 percent of employment costs.

Last month, income at the disposal of households after adjusting for inflation fell 0.2 percent. %VIRTUAL-article-sponsoredlinks%That move could take some steam out of consumer spending in the first quarter.

Weak income growth against a fairly strong spending backdrop at the end of last year led to less saving. The saving rate - the percentage of disposable income households are socking away - fell to an 11-month low of 3.9 percent in December.

It was at 4.3 percent in November.

"The U.S. consumer has continued to rely heavily on savings," said Eugenio Aleman, a senior economist with Wells Fargo Securities (WFC) in Charlotte, N.C.

"The U.S. can continue to rely a bit longer on bringing down the saving rate. At some time during this year we expect that consumption is going to weaken if we do not see some pickup in personal income and or a stronger recovery in consumer credit."

In light of the firming demand, inflation increased a bit in December. A price index for consumer spending rose 0.2 percent after being unchanged for two consecutive months.

Over the past 12 months, prices rose 1.1 percent, compared to an advance of 0.9 percent in November.

Excluding food and energy, the price index for consumer spending rose 0.1 percent, rising by the same margin for a sixth straight month. Core prices were up 1.2 percent from a year ago, after rising 1.1 percent in November.

Both inflation measures remain stuck below the Federal Reserve's 2 percent target. That suggests that the Fed, which is gradually reducing the amount of money it is pumping into the economy, will hold interest rates near zero for a while.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Spending Up in December, Confidence Slips This Month
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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