Strong US consumer, business spending bolster growth picture

WASHINGTON (Reuters): US consumer spending accelerated in November and shipments of key capital goods orders increased for the 10th straight month, data showed on Friday, the latest signs of strong momentum in the economy as the year winds down.

But the bullish growth picture was dimmed somewhat as the figures also showed household savings dropped last month to the lowest level in more than nine years. Low savings could hurt consumer spending, though economists are optimistic wage growth will pick up in the new year.

Economists see a modest lift to consumer spending from a $1.5 trillion tax cut package approved by the Republican-controlled US Congress this week, in the largest overhaul of the US tax code in 30 years.

The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.6% last month after gaining 0.2% in October. Spending last month was buoyed by an increase in demand for motor vehicles, recreational goods and utilities.

When adjusted for inflation, consumer spending increased 0.4% in November from unchanged in the prior month. Personal income rose 0.3% last month, with wages increasing 0.4%.

As a result, households dipped into their savings, which fell to $426.2 billion - the lowest level since August 2008 and down from $466.9 billion in October. The saving rate dropped to a 10-year low of 2.9% from 3.2% in October.

In addition to savings, consumer spending is being driven by record household wealth, thanks to a booming stock market and rising home prices.

With the US economy near full employment, economists argue that the tax cuts will only provide a modest boost to growth. President Donald Trump signed the tax legislation into law on Friday. It slashes the corporate income tax rate to 21% from 35% and offers tax cuts for individuals.

The Trump administration argues that the tax cuts will boost both business and consumer spending. But the individual income tax cuts are skewed toward higher-income households, which economists say have a low propensity to consume.

Economists also believe companies will use much of the windfall on stock buybacks and debt reduction.

Despite the increase in spending, monthly inflation remained benign in November. The Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding volatile food and energy prices, rose 0.1% in November after gaining 0.2% in October.

The so-called core PCE price index increased 1.5% in the 12 months through November, picking up from 1.4% in October. It has undershot the Fed’s 2% target since mid-2012 and its progress could determine the pace at which the US central bank raises interest rates next year.

The Fed increased borrowing costs three times this year and has forecast three rate hikes in 2018.

In a second report on Friday, the Commerce Department said shipments of non-defense capital goods orders excluding aircraft – a closely watched proxy for business spending - rose 0.3% after surging 1.3% in October.

Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They have risen every month since February, the longest stretch since the series started in 1992.

The increase in core capital goods shipments over the last two months suggested a strong pace of increase in business spending on equipment in the fourth quarter.

Business investment in equipment rose at its fastest pace in three years in the third quarter, but the momentum could be slowing. Core capital goods orders slipped 0.1% last month after rising 0.8% in October.

In a third report, the Commerce Department said new home sales jumped 17.5% to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007. New home sales surged 26.6% from a year ago.