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By Jason Simpkins
Consumer spending rose by its highest level in more than two years in November, evidence that American shoppers were willing to open their wallets despite market gyrations, credit concerns and declining home values.
In fact, consumers spent more than they earned, driving the personal savings rate into the red for the first time in 15 months.
The Commerce Department reported Friday that more jobs and higher salaries led to a 1.1% increase in purchases in November and a revised 0.4% gain in October. The figures are extremely positive as consumer spending accounts for at least two-thirds of U.S. economic activity.
A lackluster holiday shopping season would help fuel recessionary fears, especially since some retailers derive 60% of their profits for the year from the holiday shopping season, which starts in November.
"Consumers are feeling a pinch from higher energy costs but the overall spending surge suggests that they are ignoring it," wrote Drew Matus, an economist for Lehman Brothers Holdings Inc (LEH).
Unfortunately, inflation gathered steam, too. Core inflation climbed 0.2% for the month, a 2.2% increase from November 2006. Headline inflation, which includes food and energy costs, jumped 0.6%. But after adjusting for inflation, real consumer spending increased 0.5%, better than expected.
While many analysts are revising their fourth-quarter gross domestic product (GDP) estimates up from the 1% previously expected, few think such a high level of spending is sustainable. Weekly surveys suggest consumers may be letting up in December. Holiday sales declined in the seven days ended Dec. 15 – the third week that they did so.
According to ShopperTrak RCT Corp., this year’s holiday season may still be the weakest in five years.
For now, however, economists remain optimistic.
"Consumer resilience remains a feature of the U.S. economic picture," Peter Kretzmer, senior economist at Bank of America Corp. (BAC) told Bloomberg News.
Spending this quarter will be "consistent with sustained economic growth," he said.
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