Despite Crises, Spending Rose 1.1% in November

By Neil Irwin
Washington Post Staff Writer
Saturday, December 22, 2007

The housing market is tanking, the credit markets are in crisis, and economists fear that a recession could be on the way -- but in November at least, that wasn't enough to slow down the American consumer.

Personal spending rose 1.1 percent last month, the biggest gain in two years, the Commerce Department reported yesterday. Disposable personal income rose only 0.3 percent in November, meaning that on average, families either withdrew savings or took on more debt to buy goods and services.

The news raised hopes that the economy will not slow too much in the coming months. The Dow Jones industrial average closed at 13,450.65, up 205.1 points, or 1.55 percent.

It was the latest contradiction between what people say about the economy and what they do. In surveys, U.S. consumers said they were sharply less confident about the state of the economy in November than they had been the month before. Consumer sentiment fell again this month, according to a University of Michigan index released yesterday.

That wasn't enough to keep people out of stores. "Apparently Americans are really depressed so are compensating by going shopping," said David A. Wyss, chief economist at Standard & Poor's. "It's retail therapy."

Part of the gain was probably because Thanksgiving came early this year, so there was more holiday shopping than usual in November. And gasoline prices rose steeply; in the short run, consumers tend not to adjust how much gas they use or how much other stuff they buy because of such price increases, though that could change if the higher prices persist.

But the spending increase was so large, economists said, that those idiosyncrasies don't account for all of it. Even adjusted for inflation, spending rose 0.5 percent. The reading is stronger than other measures of what consumers are doing but is consistent with retail sales numbers that show strong spending in November.

"For two years now, we've been talking about the idea that housing will get weak and that will affect consumer spending," said Neal Soss, chief economist at Credit Suisse. "That simply hasn't happened yet. It may happen soon, but it hasn't happened yet."

There was more worrisome news in the report. Inflation accelerated, according to the personal consumption expenditure price index, with prices up 0.6 percent in November. Federal Reserve officials prefer that measure of inflation.

Prices excluding food and energy costs, using that measure, are up 2.2 percent over the past year, suggesting that higher fuel costs are rippling through the economy. While that level of inflation is hardly epic, it is outside the Fed's comfort zone of 1 to 2 percent.

Thus, the good news about the economy mixed with bad news about inflation offers some vindication to the central bank, which was criticized for cutting interest rates only modestly this month.

The Federal Open Market Committee meets again Jan. 30, and, based on prices in futures markets, investors think there is a 45 percent chance it will cut its benchmark federal funds rate by a quarter percentage point, a 35 percent chance it will take no action, and a 20 percent chance it will cut by half a percentage point or more.

The Fed has been particularly concerned that banks have become reluctant to lend one another money, increasing short-term borrowing costs for many consumers and businesses. In response, the central bank held two auctions of cash this week, of $20 billion each, to pump liquidity into the system.

They were viewed in the marketplace as reasonably successful, and the Fed announced yesterday that it will continue to hold such auctions "for as long as necessary" to relieve pressure in the markets for short-term cash.

"There's a sense that the authorities are saying the money markets must be under official control and that they will move heaven and earth to get to that outcome," Soss said.

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