Consumer spending hits four-year high thanks to holiday splurge

In the last three months of 2010 consumer spending reached its highest rate since early 2006. Spending should cool a bit, but the report is a positive sign for the economic recovery.

Tony Gutierrez/AP
A shopper in Waco, Texas, shops for a holiday gift at the Family Dollar store on Dec. 14, 2010. Consumer spending rose sharply in December.

A holiday-season rush pushed consumer US spending to its strongest quarterly gain in more than four years – a display of confidence that adds to other recent signs that an economic recovery is gathering strength.

Spending grew at an annualized pace of 4.4 percent for the final three months of last year, the best showing since the first quarter of 2006, the Commerce Department reported Monday.

In part, the gains reflected an end-of-year retail splurge. Consumer spending rose in December by 0.7 percent from the prior month, which outpaced a 0.4 percent gain in personal income for the month.

But in general, both consumer incomes and spending are on an upward path, and the income gains have increasingly been coming from private-sector wages rather than government-supported programs.

"The growth here was supported by broad-based gains in wages and salaries," said economists Mark Vitner and Tim Quinlan of Wells Fargo Securities in an analysis of the new numbers. By contrast, "at the outset of this recovery, much of the income growth was concentrated in transfer payments, which includes categories such as social-security payments and unemployment benefits."

That bodes well for the notion, embedded in many professional forecasts, that the economy is on track for modest self-sustaining growth – with rising consumer demand nudging businesses toward new hiring, which in turn adds new income for consumers to spend.

But most economists don't predict a continuation of annualized spending growth of 4.4 percent.

That's the case even though American incomes are poised to get another form of government "stimulus" in 2011: a cut in payroll taxes that was passed by Congress along with extensions of Bush tax cuts. The problem is that many consumers are still weighed down by high levels of debt or the risk of foreclosure, and the unemployment rate is still high.

Wells Fargo Securities, for example, predicts that consumer spending will rise at a pace of 2 to 3 percent this year. Another forecast, by Paul Kasriel at the Northern Trust Co., calls for 3 percent growth in personal consumption.

In general, forecasters envision only a slow recovery for the job market. Consumer incomes simply aren't growing all that fast, adjusted for inflation. Real per capita incomes have grown just 1.5 percent over the past four quarters.

And some big post-recession challenges remain: A high rate of home foreclosures, the risk that Europe's economy could falter amid a debt crisis, and now the spread of unrest – fueled partly by pocketbook anxieties – in the Middle East.

Still, the recent consumer news is a reminder that US households have been making considerable progress since the recession. The savings rate (the share of disposable income that's not spent) has been hovering in the range of 5 to 6 percent, well above its pre-recession level. That's a sign that families are working to rebuild everything from emergency funds to retirement accounts.

And record debt-to-income ratios, reached before the recession, have declined.

Consider one prominent measure of the household debt burden called the "financial obligations ratio," which looks at key household payments such as mortgages, rent, home insurance, property taxes, and auto loans. Those obligations peaked at 18.9 percent of disposable income in the third quarter of 2007, and now stand at 16.8 percent of income, according to the Federal Reserve. For comparison, this ratio was 16.0 percent of income in the first quarter of 1980.

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