Consumer spending rises in December, income flat

WASHINGTON (Reuters) - U.S. consumer spending rose more than expected in December, but weak income growth suggested the economy could cool off in the first quarter.

The Commerce Department said on Friday that consumer spending increased 0.4 percent after rising by a revised 0.6 percent in November.

Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of U.S. economic activity, rising 0.2 percent last month.

The dollar pared losses against the yen and held gains versus the euro after the data. U.S. stock index futures were down largely on weak inflation data from Europe.

When adjusted for inflation, consumer spending rose 0.2 percent after advancing 0.6 percent in November.

The figures were included in the advance fourth-quarter gross domestic product report published on Thursday and confirmed the strong momentum in spending at the end of 2013.

Consumer spending recorded its strongest gain in three years in the fourth quarter, helping to lift the economy to a 3.2 percent annual growth rate during that period.

Income, however, was unchanged last month after rising 0.2 percent in November. Income continued to be held back by stagnant wage growth as the economy works through slack in the labor market.

But there are signs that wage growth could be on the brink of acceleration. In a separate report, the Labor Department said wages and salaries increased 0.6 percent in the fourth quarter, the biggest jump since the third quarter of 2009.

It followed a 0.3 percent advance in the third quarter. Wages and salaries account for 70 percent of employment costs.

They were up 1.9 percent in the 12 months through December, the largest gain since 2009, and were up 1.7 percent in the same period in 2012.

Last month, income at the disposal of households after adjusting for inflation fell 0.2 percent. That move could take some steam out of consumer spending in the first quarter.

"I think we are heading for some choppy spending over the next several months," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"Spending will be tested by several factors. The volatility in equity markets and the turmoil in the emerging markets could affect investor sentiment . We also have the loss of unemployment benefits and food stamps for a lot of Americans."

Weak income growth against a fairly strong spending backdrop at the end of last year led to less saving. The saving rate - the percentage of disposable income households are socking away - fell to an 11-month low of 3.9 percent in December.

It was at 4.3 percent in November.

In light of the firming demand, inflation increased a bit in December. A price index for consumer spending rose 0.2 percent after being unchanged for two consecutive months.

Over the past 12 months, prices rose 1.1 percent, compared to an advance of 0.9 percent in November.

Excluding food and energy, the price index for consumer spending rose 0.1 percent, rising by the same margin for a sixth straight month. Core prices were up 1.2 percent from a year ago, after rising 1.1 percent in November.

Both inflation measures remain stuck below the Federal Reserve's 2 percent target. That suggests that the Fed, which is gradually reducing the amount of money it is pumping into the economy, will hold interest rates near zero for a while.

(Reporting by Lucia Mutikani; Additional reporting by Richard Leong in New York; Editing by Paul Simao)