Income, spending edge past forecasts

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NEW YORK (CNNMoney.com) -- Consumer spending posted only a narrow gain in December, another sign of a weak holiday shopping season and a slowing economy, although readings on spending and personal income were a bit better than forecasts, according to a government report Thursday.

Spending by individuals rose 0.2%, well below November's 1% rise, which was revised slightly lower in the Commerce Department report. Economists surveyed by Briefing.com had forecast only a 0.1% gain in the month that included the key holiday shopping period.

The pickup in spending was due primarily to higher prices. In constant dollars, spending was unchanged in the latest reading.

Personal income rose 0.5% in December, after a 0.4% rise the previous month. Economists had forecast another 0.4% rise.

The rise in personal income outpaced the change in prices, leading to a 0.2 percent rise in real income in the period. It was the first time since September that income gains had outpaced price increases.

Because income gains outpaced spending, consumers posted a narrowly positive savings rate in the month - 0.2 percent. That means the average household saved $2 on every $1,000 of after-tax income. In November, after-tax income essentially matched spending, leaving a zero savings rate.

The report also includes the so-called core PCE deflator - a key reading closely watched by the Federal Reserve that measures prices paid by consumers for goods and services other than food and energy. It showed a 2.2% rise from year-earlier levels, the same as in November and in line with forecasts.

The Fed is generally believed to want to see the core PCE deflator between 1% and 2%. But the fact that it effectively didn't move from November means the central bank is more likely to continue to focus on the slowdown of the economy rather than inflation as it makes decisions about interest rates going forward.

On Wednesday, the Federal Reserve cut interest rates for the second time in eight days. Its statement said that while it will continue to monitor price pressures, it expects inflation to moderate in coming quarters.

In other economic news, the Labor Department reported a jump in initial jobless claims for last week. Those filing for first-time benefits jumped by 69,000 to 375,000. Economists had only been looking for claims of 320,000 in the latest reading.

The Labor Department also reported that the Employment Cost Index rose 0.8% in the fourth quarter, matching both the increase seen in the third quarter and the consensus forecast of economists. The wage component of the index increased 0.8%, although the benefit costs increased at a 0.9% rate.