Consumer, business spending point to slower growth

A worker does quality checks on razor blades manufactured at Gillette's factory in Boston, Massachusetts December 5, 2011.

WASHINGTON (Reuters) - Consumer spending was tepid in November and a gauge of business investment fell for a second straight month, suggesting the economy lost some of its recent momentum.

Some analysts trimmed fourth-quarter growth forecasts after the weak consumption and factory data on Friday. But many still expected output to expand at an annual pace of more than 3 percent, faster than the 1.8 percent in the July-September period.

"The economy got off to a solid start this quarter, but it seems to have cooled a little bit in November. Growth is still going to be strong this quarter, but it's going to slow in the first half of 2012 because of Europe," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Consumer spending ticked up 0.1 percent last month, the Commerce Department said, after rising by the same margin in October. Economists had expected spending, which accounts for two-thirds of U.S. economic activity, to rise 0.3 percent.

When adjusted for inflation, spending rose 0.2 percent last month after a similar gain in October.

In another report, the department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.2 percent last month after declining 0.9 percent in October.

Shipments of these so-called core capital goods, which go into calculations of U.S. gross domestic product, dropped for a third straight month.

This suggests that business spending, which has been robust since the start of the recovery in mid-2009, could slow considerably from the third-quarter's 15.7 growth percent pace.

Economists said uncertainty about fiscal policy at home and the debt crisis in Europe were causing businesses to becoming more cautious about spending.

The ability of U.S. consumers to keep on spending while incomes remain weak is also a potential drag on growth in early 2012.

"No one is putting themselves out there in terms of business expansion and capital equipment because it's a dangerous world out there and there are still a lot of risks in terms of Europe and China," said Steve Blitz, senior economist at ITG Investment Research in New York.

Still, the economy continues to show resilience in the face of slowing global demand. New orders for manufactured goods meant to last three years and more jumped 3.8 percent last month after being flat in October.

Excluding transportation, orders rose 0.3 percent after rising 1.5 percent in October. Order backlogs are building up and inventories at factories are not rising much, indicating that manufacturing activity will continue to expand.

Other data added to signs a tentative recovery in the housing market, which should also help to support growth.

Investors on Wall Street latched onto the positive aspects of the reports and pushed up stocks for a fourth straight day.

The Standard & Poor's 500 index turned positive for the year. Prices for long-dated U.S. Treasury debt fell sharply, while the dollar was broadly unchanged.

INCOME BARELY RISES

The weak consumer spending data stood in stark contrast with the robust sales reported for Black Friday, the traditional start to the holiday shopping season. Some retailers have been forced to offer heavy discounts to get shoppers to spend.

"Retail has been very promotional and consumers have been very value-conscious," Best Buy Co CEO Brian Dunn said on a conference call last week.

Income ticked up 0.1 percent, the weakest reading since August, as wages and salaries fell. Disposable income was flat.

A strengthening in the labor market has offered some hope income growth will quicken, but analysts said the report augured poorly for consumer spending at the start of the new year.

"The lack of real income growth really raises questions as to what is going to happen to the economy in the first quarter," said Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina.

HOUSING SHOWS A PULSE

While households may not be spending robustly, they are starting to show more interest in buying houses. Sales of new single-family homes rose 1.6 percent in November to a seasonally adjusted 315,000-unit annual rate.

That was the highest in seven months. In addition, the months' supply of houses on the market dropped to a 5-1/2 year-low, further signs of a budding recovery.

Data this week showed a rise in sales of previously owned homes and a surge in housing starts, but further progress will depend on the health of household finances.

Already, consumers have been saving less to prop up their spending. The saving rate, the percentage of disposal income socked away, dipped to a 3.5 percent annual rate last month from 3.6 percent in October.

On the bright side, the report confirmed an easing in inflation, which should help to support spending. Further help should also come from the temporary extension of payroll tax cut and benefits for the long-term unemployed.

A price index for personal spending was flat last month after falling 0.1 percent in October. In the 12 months through November, the PCE price index was up 2.5 percent, the smallest rise since April.

A core inflation measure, which strips out food and energy costs, edged up 0.1 percent last month after a similar gain in October. In the 12 months through November, it was up 1.7 percent after increasing 1.7 percent in October.

(Additional reporting by Chris Reese in New York)