WASHINGTON (Reuters) - U.S. consumer spending rose in November as incomes recorded their biggest gain in six months, but a surprise drop in new home sales to a seven-month low was a reminder that the economic recovery would be bumpy.
The Commerce Department said on Wednesday spending climbed 0.5 percent last month after increasing 0.6 percent in October. Analysts had expected consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, to rise 0.6 percent.
A separate report from the department showed sales of newly built single-family homes unexpectedly dropped 11.3 percent last month to a 355,000 unit annual rate. Financial markets had expected new home sales to increase to 440,000 units.
Analysts blamed the drop on the expectation that a popular tax credit for first-time home buyers would expire at the end of November.
New home sales are counted after a contract is signed, but closing on a contract usually takes 30 to 60 days more. The credit has since been extended and expanded and analysts expect sales to resume their upward trend in coming months.
“We are going to see a steady increase in new homes sales through next year. The reports today are supportive of a moderate economic recovery through 2010, not a V-shaped recovery, not a double-dip,” said Robert Dye, a senior economist at PNC Financial Services in Pittsburgh.
U.S. stocks fell on the housing data, but regained some ground following solid profits from some technology companies. The Standard & Poor’s 500 Index ended slightly up, while the Dow Jones industrial average was flat.
Prices for U.S. government debt snapped back from sharp losses earlier in the week. The U.S. dollar dropped versus the euro for the first time in five sessions.
A third report showed consumer sentiment improved this month as incomes rose and the job market grew less gloomy.
The Reuters/University of Michigan Surveys of Consumers’ index of consumer sentiment was 72.5, the highest in three months, after 67.4 in November.
Improving confidence and rising incomes would support spending in general and the housing market, analysts said. Personal income rose 0.4 percent last month, the largest increase since May, after gaining 0.3 percent in October, Commerce Department data showed.
The rise in income saw savings increasing to an annual rate of $525.1 billion, but the savings rate was unchanged at 4.7 percent from the prior month.
“We are getting back on track. This is a report that builds on the retail sales we saw, and we are closing the gap on jobs. Income growth will help stabilize the economy,” Robert Brusca, chief economist at Fact and Opinion Economics in New York, said of the income and spending report.
The Federal Reserve last week left overnight lending rates unchanged near zero, citing excess slack in the economy, and pledged to keep interest rates low for an “extended period.”
In an interview with ABC’s “Good Morning America” on Wednesday, Treasury Secretary Timothy Geithner said the economy was recovering, but it may be some months yet before jobs are being created instead of lost.
“The economy’s growing, it’s getting better, getting stronger and I think most people would say the economy is strengthening going into the end of the year...but the key thing is when do we get job growth back,” Geithner said.
According to some analysts, new home sales are losing out to the resale market, where many owners are desperate to sell.
“Home buyers continue to snap-up deals in the existing homes market, which has risen sharply in the past few months, crowding out purchases in the new residential market,” said Ian Pollick a strategist at TD Securities in Toronto.
A Realtors survey on Tuesday showed sales of previously owned homes surging to their highest level in nearly three years last month, with distressed sales constituting a large chunk of the transactions.
There were still hopeful signs in the Commerce Department report, with the median sale price for a new home rising 3.8 percent from October to $217,400, the highest level since May. Compared to a year-ago, the median sale price fell 1.9 percent.
The number of new homes on the market last month still fell to 235,000, the lowest since April 1971.
“There is no threat to the production of new houses. The production side of the market is in good balance with the demand side,” said Pierre Ellis, senior economist at Decision Economics in New York.
Additional reporting by Glenn Somerville in Washington, Richard Leong and Ellen Freilich in New York