Consumer Spending Up, But Is It Good Or Bad

Consumer spending is closely watched because it accounts for two-thirds of total economic activity. Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years. Consumer spending surged by 1.1% last month, nearly triple the October gain. (That in my opinion is a bogus comparison. Obviously with holiday season November sales will be better than October)

The gain reflected various promotional efforts by retailers such as heavy discounting and longer store hours at the start of the holiday shopping season. (That means smaller profits for retailers. More the reason to stay away from retail stocks.)

Incomes were also up last month, rising by 0.4%, double the October increase but slightly below the advance that had been expected. (Income rising is a good thing. Finally something to cheer about.)

An inflation gauge tied to spending showed a 0.6% increase in November, the biggest jump in more than two years, reflecting last month’s big surge in gasoline prices. (There you go. With inflation taken into account it looks a different story now)

Excluding energy and food, prices were up 0.2%. Core inflation is up 2.2% over the past 12 months, above the upper range of the Federal Reserve’s comfort zone of 1 to 2%. (Above Fed’s comfort zone, could it mean less chance of a rate cut ??)

The big jump in spending came at a critical time for retailers — the start of the all-important holiday shopping season. But there have been more recent signs that sales slowed in December. (Good news or Bad news ??)

With spending rising at a faster rate than savings, the nation’s savings rate dipped into negative territory in November at 0.5%. That meant that households spent all of their incomes and either dipped into savings or borrowed to finance the higher level of spending last month. (What is wrong with this country. Beats me)

Conclusion: Many economists believe that overall economic growth will be at a rate of 1% in the current quarter, as the country struggles with the fallout from the housing downturn and a spreading credit crisis that has made bank loans harder to get for individuals and businesses. While the risks of a recession have risen, the Federal Reserve is fighting to avert a full-blown downturn by cutting interest rates. It has not been as aggressive as financial markets want, however, because of Fed worries about inflation pressures. (Feds have a tough task ahead. Its financial markets versus inflation. Who will get preference over the next FOMC meeting. Additional rate cut means more inflation, weak dollar, high oils. No rate cut means deeper credit crunch. Pick one)