Americans look past fiscal debate as spending climbs

Spending rose in America during November (Getty Images)

Americans looked past the debate on fiscal policy in November as consumer spending and demand for durable goods climbed, indicating the economy strengthened heading into the current impasse on tax rates and spending cuts.

Household purchases rose 0.4 percent last month after a 0.1 percent drop in October that was smaller than first estimated, Commerce Department figures showed Friday in Washington. Orders for long-lasting items such as machinery and computers increased 0.7 percent, more than twice the 0.3 percent advance projected by median forecast of economists surveyed by Bloomberg, according to other Commerce Department data.

Gains in employment and housing encouraged consumers to buy gifts for the holidays last month and replace autos damaged by superstorm Sandy. Concern that lawmakers will fail to avert more than $600 billion in tax increases and government spending cuts slated to begin in January contributed to a slump in household confidence this month and caused stocks to tumble today, raising the risk that the rebound will be short-lived.

"The numbers are encouraging," said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly forecast the increase in spending. "There's business that has to get done whether or not these guys iron out this thing in Washington in a timely fashion. We're going to start the year off slowly and gradually build momentum" because there will probably be a last-minute deal, he said.

Economists' projections for November U.S. consumer spending ranged from gains of 0.2 percent to 0.7 percent. The Commerce Department initially reported that October spending dropped 0.2 percent.

The report also showed incomes climbed 0.6 percent in November, the most since February, after a 0.1 percent increase the prior month. Superstorm Sandy cut pay by about $18.2 billion at an annual rate in October, the Commerce Department said. Economists projected incomes would increase 0.3 percent, according to the median estimate.

Wages and salaries also advanced 0.6 percent in November after falling 0.3 percent a month earlier. Because the increase in pay surpassed the gain in spending, the saving rate climbed to 3.6 percent in November from 3.4 percent the prior month.

Industry figures show car and light truck sales rebounded in November as buyers returned to showrooms following the storm. Light vehicles sold at 15.5 million annual rate last month, the most since 2008, according to data from Ward's Automotive Group.

The holiday shopping season also started off strongly, with consumers spending 13 percent more during the four-day U.S. Thanksgiving weekend than in the same period in 2011. Purchases rose to $59.1 billion from Nov. 22 through Nov. 25 from $52.4 billion last year, according to the National Retail Federation.

Friday's report showed inflation-adjusted spending, the figures used to calculate economic growth, increased 0.6 percent in November, the biggest gain since August 2009. Price-adjusted purchases of durable goods, including automobiles, rose 2.9 percent after a 0.9 percent October drop.

The increase in demand for durable goods such as machinery and electronics in November showed companies were planning to expand next year as they looked beyond the tax increases and spending cuts slated to take effect.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, rose 2.7 percent last month after a revised 3.2 percent gain in October that was larger than previously estimated, today's report on durable goods showed.

Shipments of those items, used in calculating gross domestic product, increased 1.8 percent in November, the biggest gain in eight months, after a 0.6 percent advance the prior month that was previously estimated as a 0.1 percent decline. The back-to-back advance indicates business spending is rebounding this quarter.

Companies will probably be more willing to invest as global growth stabilizes and American consumers keep spending. Manufacturers such as Comtech Telecommunications Corp. are looking for clarity from Washington to spur a rebound in government orders.

"The ongoing paralysis in Washington continues to make the receipt of orders a challenge" Fred Kornberg, chief executive officer of Melville, N.Y.-based Comtech Telecommunications, said on a Dec. 7 earnings call referring to demand from government customers. "We were hoping for some additional clarity once the presidential election was over. But worry about the election has now been replaced by panic about the fiscal cliff."

Concern about the deliberations was evident as another report showed consumer confidence slumped this month. The Thomson Reuters/University of Michigan consumer sentiment index decreased to 72.9, the weakest since July, from 82.7 in November. Economists projected a final reading of 75 for December, according to the median of 66 estimates in a Bloomberg survey. Today's figure was lower than a preliminary report earlier this month.

The figures contrast with Bloomberg's Consumer Comfort Index, which climbed to an eight-month high last week as the housing rebound and a drop in gasoline prices helped offset concern about the tax outlook.

The strength of consumer spending early next year depends on whether job creation will feed into income growth and whether Congress allows taxes to rise in January, thereby eating into Americans' paychecks. A healing housing market will also help stir spending by boosting household wealth, and falling gasoline prices could shore up buying power.

"Consumers will need to prioritize how and where they are spending," Robert Hull, chief financial officer of home- improvement retailer Lowe's Cos. Inc., said during a Dec. 5 investor conference. "The lead-up to the fiscal cliff and its outcome has the potential to negatively impact both consumer and business spending."

— With assistance from Kristy Scheuble in Washington.