Nov. Spending Hot, Outlook Cloudy

Americans spent at their fastest pace in two years in November, the Commerce Department said Friday, easing concerns about a near-term recession.

Spending jumped 1.1% from October, the biggest gain since July 2005 and easily beating forecasts.

Incomes rose 0.4%, below the expected 0.5% rise. But wages were up a healthy 6.1% from last year.

Many analysts had expected the economy to slow sharply or even fall into recession amid severe housing and credit woes. But decent job and wage growth have so far bolstered consumer spending.

"You can bet there are a lot of Wall Street economists revising their fourth-quarter GDP forecasts," said Richard Yamarone, chief economist at Argus Research. "This economic party makes recession talk laughable."

He said he may boost his fourth-quarter growth target to a 2% annual rate from the current 1.7%.

"The bottom line is that Americans are fully employed and they're earning solid incomes and they spend," Yamarone said.

Lakshman Achuthan, managing director at the Economic Cycle Research Institute, agrees that "doomsayers" who predicted a recession in 2007 have been proved wrong.

"But looking forward at 2008, we've got problems," he said.

The ECRI leading U.S. index's growth rate has hit a 5-year low of -4.8%. Typically a -5% to -6% reading is needed for a recession.

Housing is getting worse, he says, and "we're starting to see layoffs."

Jobless claims have picked up, with the 4-week average climbing to a 2-year high in the latest week.

Still, stocks rallied on the spending data and strong earnings from Research In Motion. (NASDAQ:RIMM) The Nasdaq rose 1.9% and the S&P 500 1.7%.

The 10-year Treasury yield rose 12 basis points to 4.17%, in part due to worrisome inflation data.

The income report's PCE deflator rose 0.6% from October and 3.6% vs. a year earlier -- both the highest since late 2005.

The core PCE, which excludes food and energy, rose 2.2% vs. a year earlier. That's the most since March and above the Federal Reserve's 1% to 2% comfort zone.

"This could limit Fed rate cut actions going forward unless the economy is weak enough to offset inflation risks," Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., said in a note.

But other economists don't think the Fed's hands will be tied.

"The inflation outlook is not too scary," Achuthan said. "There's more room for policy action than people think. That's why I say recession is not inevitable."