Household income trending up, boost for spending

Household income grew at a faster pace in the fourth quarter than previously thought, which should help underpin spending this quarter.

The Commerce Department said on Thursday personal income increased to a seasonally adjusted annual rate of $13.162 trillion, $3.3 billion more than reported last month, likely reflecting the strengthening labor market.

Growth in disposable income was $10.6 billion more than previously estimated.

While the government’s final estimate left gross domestic product growth at an unrevised 3.0 percent pace last quarter, when measured from the income side, output increased at a 4.4 percent rate.

That was the fastest rise in gross domestic income since the first quarter of 2010 and followed a 2.6 percent rise in the third quarter.

“The data paints a clear picture of an economy that built momentum throughout the course of the year, closing on a high note,” said Jim Baird, chief investment strategist for Plante Moran Financial Advisors in Kalamazoo, Michigan.

The department also said after-tax profits increased at a 1.1 percent rate, slowing from 2.7 percent the prior quarter. The slowdown in profits reflects the increase in wage costs as companies step up hiring.

Rising incomes should help to cushion consumer spending against surging gasoline prices. Spending, which accounts for about 70 percent of U.S. economic activity, grew at an unrevised 2.1 percent pace in the fourth quarter.

Other data on Thursday showed initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 359,000, the lowest level since April 2008, the Labor Department said on Thursday.

While the economy grew solidly in the final three months of 2011, momentum has slowed this quarter amid signs of cooling in manufacturing, business spending and a pause in the housing market recovery – even as the labor market strengthens.

Federal Reserve Chairman Ben Bernanke this week said growth needed to accelerate to bring the unemployment rate down further. While he offered no sign that the U.S. central bank would launch a third round of bond purchases or quantitative easing, Bernanke said all options remained on the table.

First-quarter growth is seen around 2 percent, also as the economy loses the boost from restocking by businesses. However, rising gasoline prices are a wild card.

So far there is little sign that consumers have cut back, with auto sales surging in both January and February.

The build-up in business inventories accounted for the bulk of the rise in output in the last quarter. But the final GDP revisions showed a slightly better tone in the overall growth picture.

Business spending was revised up to a 5.2 percent growth rate from 2.8 percent, to account for slightly stronger investment in equipment and software. That offset weaker export growth.

There were also small upward revisions to spending on home building projects. Though home sales stumbled in February, the housing market is slowly recovering and homebuilding is expected to contribute to growth this year for the first time since 2005.

While the rebuilding of inventories added a hefty 1.81 percentage points to GDP in the last quarter, the pace of accumulation was not as fast as previously reported. Business inventories increased $52.2 billion, instead of $54.3 billion.

Excluding inventories, the economy grew at an unrevised 1.1 percent rate. That was a sharp step-down from the prior period’s 3.2 percent pace.

WASHINGTON (Reuters) – (Reporting by Lucia Mutikani; Editing by Andrea Ricci)