Consumers, companies shrug off fiscal cliff fears

Consumer spending rose in November by the most in three years and a gauge of planned business spending jumped, signs that households and companies are shrugging off some of the fears tighter fiscal policy could cause a recession.

The Commerce Department said on Friday inflation-adjusted consumer spending rose 0.6 percent, while after-tax income climbed 0.8 percent when adjusting for changes in prices.

Many economists think business and consumers are wary of automatic government spending cuts and tax increases scheduled to kick in early next year, a scenario known in Washington as the "fiscal cliff."

"The economy is holding in here at the end of the year despite the concerns about the fiscal cliff," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis.

Economists have been expecting economic growth will slow in the fourth quarter as companies slow the pace at which they re-stock their shelves, but the data on spending suggests consumers are offsetting some of that drag.

Consumer spending grew at just a 1.6 percent annual rate in the third quarter. Real spending declined in October, but November's gain was the strongest since August 2009.

That suggested purchases by consumers were not taking the hit many expected due to growing fears that going over the fiscal cliff will push the economy into recession. However, consumer confidence declined sharply in early December.

Late on Thursday, a Republican proposal for averting the fiscal cliff was abandoned, further eroding optimism that a deal would be reached quickly.

U.S. stock index futures were sharply lower after the proposal was dropped.

Spending before taking into account changes in prices rose 0.4 percent. Economists polled by Reuters had expected nominal consumer spending would rise 0.3 percent last month.

INVESTMENT PLANS

In a separate Commerce Department report, a gauge of planned U.S. business spending rose much more than expected in November, a hint that worries over tighter fiscal policy may not be holding back the factory sector as much as feared.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for investment plans, jumped 2.7 percent last month, the second straight month of solid gains.

Economists had expected so-called core capital goods orders to rise just 0.3 percent. The reading for October was upwardly revised to a 3.2 percent gain from a previously reported 2.9 percent increase.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the gross domestic product report, gained 1.8 percent.

Many economists believe businesses, wary of the fiscal cliff, have been cutting back on capital spending.

Going over the cliff could drain about $600 billion from an already fragile economy.

Overall durable goods orders rose 0.7 percent in November, with increases posted for machinery, fabricated metal products, and computer and electronic products offsetting a drag from aircraft.

Economists polled by Reuters had forecast orders for durable goods, items from toasters to aircraft that are meant to last at least three years, rising 0.2 percent last month.

Excluding transportation, orders rose 1.6 percent in November. Transport orders were down 1.1 percent. Previously, U.S. manufacturer Boeing reported new orders for its aircraft fell in November to 124 from 152 in the prior month.

New orders for autos jumped 3.5 percent. U.S. auto sales in November raced to a five-year high for that month on a rebound from storm-ravaged October and the need to replace aging vehicles.

The Commerce Department gave no indication that Superstorm Sandy, which lashed the East Coast in late October, had any impact on either of the economic reports.

(Additional reporting by Ellen Freilich in New York; Editing by Andrea Ricci)