Annual Consumer Spending Jumps Most Since 2007

Americans spent at the fastest pace in three years in 2010, boosted by a strong finish in December.

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

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

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

Economists expect a cut in Social Security taxes will lift January's spending and incomes even further that last month.

But Paul Dales, senior U.S. economist at Capital Economics, said the boost could be short-lived without job growth.

For 2010, incomes rose 3 percent after having fallen 1.7 percent in 2009. Still, incomes grew at the second-lowest annual pace in the eight years.

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

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

The December spending gain was powered by a 1.5 percent rise in purchases of nondurable goods, such as clothing and food. Consumers boosted their spending 0.7 percent on long-lasting products such as autos and appliances. Spending on services rose 0.4 percent.

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 percent 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 percent, the best performance since 2005. That's a sharp contrast to the 2.6 percent drop in GDP in 2009, the worst decline in more than 60 years.