U.S. personal incomes rose at their fastest rate in more than five years, and consumer spending accelerated, setting the stage for a fine holiday shopping season and, possibly, for yet another Federal Reserve Board interest-rate increase.
Incomes rose 1.3 percent in October to a seasonally adjusted annual rate of $7.941 trillion after holding steady in September, the largest rise since a like-sized increase in April 1994, the Commerce Department announced yesterday.
Last month's growth derived some of its strength from emergency subsidies to farmers, and still more from bonuses paid to unionized auto and aerospace workers as part of contract settlements.
Personal spending grew 0.6 percent in October to a $6.379 trillion annual rate, topping the 0.5 percent rise in September. Spending has risen at a 7.4 percent annualized clip in 1999's first 10 months, compared to 6.8 percent last year -- and that's even before yesterday's kickoff to the Christmas shopping season.
"The bottom line is that consumers do have the means to continue their spending spree," said Sung Won Sohn, senior economist for Wells Fargo & Co. in Minneapolis. "Normally, consumer spending accounts for about 65 percent of economic growth. So far this year, it's been more like 85 percent that's basically why I called it a consumer 'spending spree.' "
If it continues, that blistering spending spree will serve as a virtual invitation to the Fed to raise interest rates, which it's already done three times since June. Most economists say the nation's central bank will stand pat on rates when it meets next month, but will likely raise them in February, its first scheduled meeting of 2000.
"We're looking at another quarter of GDP growth at or over 4 percent, a pace that will not make the Fed happy," predicted economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. Gross domestic product shot ahead at a 5.5 percent annual rate in the third quarter, the most vigorous growth since the closing months of last year. In the immediate term, with end-of-year worries about the Y2K software bug and high oil prices, Federal Reserve Chairman Alan Greenspan will take care not to "shock" the economy with a rate increase, said Paul Christopher, economist with A. G. Edwards & Sons Inc. in St. Louis.
A fourth rate increase -- or even the threat of one -- could start to squeeze stock prices, which have been strong of late: particularly technology and Internet shares.
Record after record highs have been set on the Nasdaq composite index, which is heavily weighted in high-tech stocks.
High stock prices have helped fuel the powerful consumer-spending wave, since individuals see big gains in their holdings and feel comfortable enough to spend more of their paychecks than normal. Greenspan has identified this so-called "wealth effect" as an important consideration in his ever-present war on currently non-existent inflation.
Some economists believe holiday spending could reach the highest level this decade: 6 percent, eclipsing the 5.6 percent increase in 1992 and the 5.1 percent rise in each of the last two years.
Spending of that magnitude could power the nation's economy to an annualized growth rate of 5.5 percent, or about two percentage points higher than the pace the Fed believes the domestic economy can bear without inviting inflation to return.
A. G. Edwards' Christopher says inflation has disappeared because of low-priced commodities, which serve as the main ingredients of most finished products, and some of the strongest wage growth in years -- thanks to a worker shortage that's forcing firms to bid for employees or leave some jobs open.
Wire services contributed to this article.