Confident consumers brighten U.S. economic outlook

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer sentiment and spending both hit five-month highs heading into the end of the year, the latest sign of sustained strength in the economy and fostering hopes of a strong 2014.

Consumer spending rose in November at the strongest pace since June and an upbeat sentiment reading for December suggests consumers will keep shopping despite tepid income growth.

"Next year is shaping up to be the better tomorrow we have wanted to see ever since the recession ended almost five years ago," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending rose 0.5 percent after gaining 0.4 percent in October, the Commerce Department said on Monday. The rise matched economists' expectations and was the seventh consecutive month of increases in consumer spending, which accounts for more than two-thirds of U.S. economic activity.

When adjusted for inflation, consumer spending also increased 0.5 percent, the largest rise since February 2012.

The data indicates that consumer spending in the last three months of 2013 probably accelerated from the third quarter's 2 percent annual rate. Spending is being lifted by improving household balance sheets, thanks to a rising stock market and house prices.

A second report showed the Thomson Reuters/University Michigan's overall index of consumer sentiment jumped to 82.5 this month, the highest reading since July. It improved from 75.1 in November and was unchanged from the preliminary reading released earlier this month.

U.S. stocks touched all-time highs, while prices for U.S. government debt slipped. The dollar fell against a basket of currencies.

GROWTH NOT FANNING INFLATION

The reports added to other fairly strong data, such as employment and industrial production, in suggesting the economy retained some of its third-quarter momentum in the lead-up to the end of the year and was poised for faster growth in 2014.

They also fit in with the Federal Reserve's upbeat view on growth, which prompted the central bank to announce last week that it would start trimming its monthly bond purchases from January.

The U.S. economy grew at a 4.1 percent clip in the July-September period, the fastest pace in nearly two years, after expanding at a 2.5 percent rate in the second quarter.

International Monetary Fund managing director Christine Lagarde said the international lender would raise its growth forecast for the world's largest economy next year. The IMF forecast in October that the U.S. economy would expand 2.6 percent in 2014.

Despite the signs of strength in the economy, inflation remains benign. A price index for consumer spending was unchanged for a second straight month.

Over the past 12 months, prices rose 0.9 percent. The index had gained 0.7 percent in October.

Excluding food and energy, the price index for consumer spending rose 0.1 percent, increasing by the same margin for a fifth straight month. Core prices were up 1.1 percent from a year ago.

Both inflation measures continue to trend below the Fed's 2 percent target, which would suggest the U.S. central bank could keep interest rates near zero for a while, even as it reduces its bond purchases.

"Stronger growth supports Fed tapering but modest inflation means the pace of tapering will be slow," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Personal income rose 0.2 percent, rebounding from a 0.1 percent dip in October. The increase was well below economists' expectations for a 0.5 percent gain and partly reflected cuts in food stamps.

With spending outpacing income growth, the saving rate - the percentage of disposable income households are socking away - fell to a nine-month low of 4.2 percent.

(Reporting by Lucia Mutikani, additional reporting by Ryan Vlastelica in New York; Editing by Krista Hughes)