US consumer spending up 3.5% last year

Americans increased their spending sharply in December and consumer purchases for all of 2010 rose at the fastest pace in three years, figures revealed today.

Consumer spending rose 0.7% in December, the sixth straight monthly increase, the US Commerce Department reported. Households saw their incomes rise 0.4%, the same as November.

For all of 2010, consumers boosted spending 3.5%. That was the best performance since a 5.2% rise in 2007, before the recession began.

Economists expect further gains this year that will give the economy a boost. Consumer spending accounts for 70% of total economic activity.

The government reported on Friday that consumer spending rose at a 4.4% rate in the final three months of 2010 – the most since 2006 and helping retailers to the best Christmas shopping season in that time.

For 2010, incomes rose 3% after having fallen 1.7% in 2009.

The rise in incomes and the faster increase in spending meant that the savings rate dipped slightly in December to 5.3% of after-tax incomes.

The savings rate edged down slightly to 5.8%, from 5.9% in 2009. But the 2010 figure is well above the low of 1.4% hit in 2005 at the height of the housing boom when rising home prices encouraged Americans to spend more.

The increased economic activity is not leading to higher inflation. A price gauge tied to consumer spending showed prices outside of food and energy increased 0.7% in the 12 months ending in December, a record low.

Economists expect a slowly improving job market and a payroll tax cut will boost spending further in 2011.

The big question is whether the gains in consumer spending will be enough to offset weakness in the housing market and further cutbacks in government spending.

For all of 2010, the economy grew 2.9%, the best performance since 2005. That is a sharp contrast to the 2.6% drop in GDP in 2009, the worst decline in more than 60 years.