Consumers Make, Spend and Save More in November

Andrew Klips |

Wealth Effect Improving As Economy RecoversThe Commerce Department reported Friday that consumer spending in November experienced a rise of 0.4 percent compared with October, its biggest jump in three years, signaling that perhaps Americans aren’t as worried about the fiscal cliff as most thought. The agency also said that personal income rose 0.6 percent during the month, the biggest move since February. Economists were anticipating a 0.4 percent rise in both categories.

The November climbs follow soft readings in October, where the affects of Hurricane Sandy slowed income and spending. Consumer spending is closely watched by economists as a key growth metric accounting for about 70 percent of the nation’s economic activity.

During the July to September quarter, consumer spending increased 1.6 percent. Thursday, the government reported that consumer spending grew at a 3.1 percent annual rate in the third quarter, a sharp increase from the 1.3 percent growth in the second quarter.

With income gains outpacing spending, Americans managed to sock-away more cash into savings accounts. The saving rate rose to 3.6 percent of income in November from 3.4 percent in October, the Commerce Department said. The 3.6 percent saving rate was the highest in four months.

Wages and salaries advanced $41.1 billion in November. Hurricane Sandy hitting the eastern seaboard was responsible for an $18.2 billion reduction in wages in October, according to the Commerce Department.

On a yearly basis, personal income increased 5.1 percent compared to November 2011, marking the largest year-over-year leap in five years. Consumer spending nearly matched the gains with an increase of 5 percent over last November.

Real disposable income, money that is left after taxes, rose by 0.8 percent in November, representing the biggest climb in 10 months.

Economists are still sketchy about the economy despite the November increases because of the so-called fiscal cliff, a mixture of automatic tax hikes and budget cuts set to go off on January 1 that could strip about $600 billion from the economy if regulators in Washington can’t come to terms on a new budget in the next 10 days.

Many are predicting gross domestic product growth of less than two percent in the fourth quarter and similar levels in the first quarter of 2013 with the caveat of the fiscal cliff looming as a potential driver of the unemployment rate and consumer spending. Federal Reserve Chairman Ben Bernanke has warned that the economy faces spiraling into a recession should the government not take the necessary steps to avert going over the fiscal cliff.

On Thursday night, the House of Representatives abandoned a vote on “Plan B” to stop the U.S. short of the cliff and extend current tax rates, eroding confidence that a deal will be reached by New Year’s Day.

To that end, the markets are demonstrating their disappointment with a selling barrage on Friday. Economic data has been largely better-than-expected this week, but the cliff remains the focus and is the general market driver as the 2012 winds to a close. The Dow Jones Industrial Average is posing triple-digit losses in Friday morning trading, while the S&P 500 and Nasdaq indices are down about 1 percent each.

Optimism about Washington reaching a resolution to the budget and promising economic data helped push the markets higher earlier in the week. At the current pace, Friday’s losses will pare gains, but the Dow is on track to end the week 0.32% higher, the S&P 500 0.93% ahead and the Naz green by 1.37%.

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