U.S. incomes made the strongest gain of the year in November, and spending rose for the 17th consecutive month, suggesting consumer power continues to drive the economy.
Personal income rose 0.8%-for the 13th consecutive gain and the largest since June 1996-after climbing a revised 0.6% in October, the Commerce Department said last week. Trends in income can portend future business activity, because they indicate how much consumers will be able to spend.
Spending rose 0.4% in November, after increasing 0.5% in October. The government reported a month earlier that incomes and spending had increased 0.5% in October. "Consumers are not going wild on their good incomes," said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass.
Another report showed that the number of workers applying for state unemployment benefits fell a larger-than-expected 13,000 in the week before the holidays, to 307,000, suggesting the economy continues to add jobs.
Before the reports on Wednesday, analysts surveyed by Bloomberg News expected November personal income to rise by 0.7%, spending to increase 0.4%, and claims to fall by 3,000. Asia's economic woes, in addition to swaying the financial markets, could also hurt the outlook for spending, analysts said.
"Households have become a bit apprehensive about the economic outlook as a result of the Asian financial turmoil," said William Sullivan, an economist at Dean Witter Securities. "That bears watching."
Economists, investors, and Federal Reserve policymakers watch consumer spending because it accounts for roughly two-thirds of the nation's output of goods and services. The November report also is one gauge of how much consumers spent at the beginning of the holiday shopping season, when retailers can ring up as much as 40% of their annual profits.
In the third quarter, consumer spending grew at a 5.6% annual rate, the strongest in five years. Analysts at Merrill Lynch & Co. expect spending to slow, growing at a rate between 2.5% and 3% in the current quarter and in 1998.
"Spending for motor vehicles has slowed, and chain store sales look unimpressive," said Merrill Lynch senior economist Cheryl Katz. The report showed spending on services rose 0.5% in November after increasing 0.8% in October. The government's report on retail sales, released earlier in the month, showed a slower-than-expected 0.2% rise in November after a 0.2% decline in October.
Analysts expected a strong income gain in November because the unemployment rate fell one-tenth of a percentage point, to 4.6%, the lowest level since October 1973, according to Labor Department figures released Dec. 5.
Average hourly earnings increased 7 cents, or 0.6%, in November to $12.47 as businesses offered higher wages to attract workers from a shrinking labor pool in many industries.