Consumers put aside worries about soaring food and fuel prices and a housing slump and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years.
Consumer spending rose 1.1% last month. However, some of the spending was forced as people had to spend more on food and gasoline.
US Commerce Department reported that the personal consumption rose 1.1%, which was the highest increase since May 2004 and was significantly above 0.7% which analysts had expected.
The jump came at a critical time for retailers - the start of the holiday season. But recent signs show that the spending has reduced in December.
Consumer spending is closely watched because it accounts for about 72% of the economic activity.
The department said that real incomes rose 0.4% but the savings rate was minus 0.5 percent, meaning that Americans not only spent all of their after tax income but also part of their previous years' savings or increased borrowings.
Reactions to this news by experts is mixed. Critics argue that this trend of very low or even negative savings cannot be sustained for ever and inevitably the day will come when consumers are forced to cut back on spending, sparking a recession. Others however feel that too much is being read into the figure of the savings rate. They argue that it does not take into account the money going into banks, mutual funds and retirement plans. Nor does it measure equity built into people's homes and other assets. They point out that the net worth of people is growing despite the fall in savings and that is a positive sign. Although the fall in housing prices will definitely cause a slow down in spending if it persists long enough, it is not likely to have a significant impact in the short term as people's attitudes towards spending and saving are somewhat slow to change.Moreover the housing sector only accounts for about 5% of the US economy.If Bernanke manages to prevent the crisis in the housing sector from spilling over to the other parts of the economy there is no reason to be worried about any temporary slowdown next year as it is likely to be only temporary.