WRAPUP 3-U.S. Q4 income trends up, boost for spending

Thu Mar 29, 2012 1:41pm EDT

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By Lucia Mutikani

WASHINGTON, March 29 (Reuters) - U.S. household income grew at a faster pace in the fourth quarter than previously thought as the jobs market strengthened, a development that could underpin consumer spending.

The Commerce Department said on Thursday real disposable income rose to a seasonally adjusted annual rate of $11.73 trillion, $10.6 billion more than previously estimated.

While its final estimate left growth in gross domestic product at an unrevised 3 percent pace last quarter, when measured from the income side, the economy expanded at a solid 4.4 percent rate - the quickest since the first quarter of 2010.

"That may indicate that there is a little more strength out there in the economy than what the GDP numbers would indicate," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

Economists said the strong rise in gross domestic income, which followed a 2.6 percent advance in the third quarter, reflected stepped-up hiring.

The firming labor market tone was underscored by a separate report from the Labor Department showing the number of Americans filing new claims for unemployment benefits eased to 359,000 last week, the lowest level in nearly four years.

Initial claims have trended lower for much of March, raising hopes of a fourth straight month of nonfarm payrolls gains above 200,000. The government will release its closely followed employment report on April 6.

"The labor market and job creation appears to have strengthened significantly in the first quarter of the year," said John Ryding, chief economist at RDQ Economics in New York.

Economists said the strengthening in income growth better explained the quickened pace of hiring seen in recent months than the more tepid increase in GDP, which they said could be understating the economy's vigor.

" GDI supports our view that recent GDP readings are too low and will be revised upward, consistent with the improvement in the unemployment rate over the past year," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

While GDP and gross domestic income estimates for a given quarter may differ because they are calculated using different data, over time, they tend to follow similar patterns of change.

With companies hiring more workers, profit growth slowed to a 0.9 percent rate in the fourth quarter, the smallest increase in three years, from 1.7 percent the prior quarter.

SLOWER FIRST-QUARTER GROWTH

While GDP grew solidly in the final three months of 2011, momentum appears to have slowed this quarter with signs of cooling in manufacturing and business spending and a pause in the housing market recovery.

Federal Reserve Chairman Ben Bernanke said on Monday that growth needed to accelerate to bring the unemployment rate down further. While he offered no sign the U.S. central bank would launch a third round of bond purchases to spur faster growth, Bernanke said on Tuesday all options remained on the table.

Growth is seen slowing to around 2 percent in the first quarter as the impetus from a restocking by businesses fades.

Rising gasoline prices, which act as a tax on consumers, present a wild card. So far there is little sign consumers have cut back, with auto sales surging in both January and February.

The gains in incomes should provide a cushion against the pain at the pump. Spending, which accounts for about 70 percent of U.S. economic activity, grew at a 2.1 percent pace in the fourth quarter, up from 1.7 percent in the prior three months.

Consumer spending data for February due for release on Friday could offer fresh clues on the health of the consumer. Spending was flat in January for the third straight month, when adjusted for inflation.

The build-up in business inventories accounted for the bulk of the rise in fourth-quarter output, although slightly less than previously believed.

Excluding inventories, the economy grew at an unrevised 1.1 percent rate. That was a sharp step-down from the prior period's 3.2 percent pace.

Business spending was revised up to a 5.2 percent growth rate from 2.8 percent, offsetting weaker export growth.

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