U.S. consumer spending gauge rises strongly; producer prices up

By Lucia Mutikani

WASHINGTON (Reuters) - A gauge of U.S. consumer spending rose solidly in November, suggesting enough momentum in the economy for the Federal Reserve to raise interest rates next week for the first time in nearly a decade.

Other data on Friday showed consumer sentiment nudged up in early December, an encouraging sign for future spending.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.6 percent after gaining 0.2 percent in October, the Commerce Department said. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

"It dismisses any concerns of a potential slump in household spending after a couple of weaker months in August and September. Not that there is much doubt any more, but this supports the case for a rate hike by the Fed next week," said Steve Murphy, U.S. economist at Capital Economics in Toronto.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surprisingly slowed in the last few months. The moderation came despite a tightening labor market, which has started to lift household income.

Separately, the University of Michigan's consumer sentiment index rose to 91.8 early this month from a reading of 91.3 in November.

The latest signs of strength in consumption prompted economists at Barclays to bump up their fourth-quarter growth estimate by one-tenth of a percentage point to a 1.8 percent annual rate. The economy grew at a 2.1 percent pace in the third quarter.

In another report, the Commerce Department said retail inventories excluding autos increased 0.4 percent in October, suggesting inventories could be less of a drag on fourth-quarter growth than previously thought. That, however, implies inventories could weigh on output in early 2016.

Solid domestic demand in November supports expectations that the Fed will raise its benchmark overnight interest rate from near zero when policymakers conclude a two-day meeting next Wednesday, despite weak inflation.

The U.S. central bank has not raised rates since June 2006. The dollar was lower against a basket of currencies, while U.S. Treasury debt yields hit session lows.

PRODUCER PRICES RISE

In a separate report, the Labor Department said its producer price index advanced 0.3 percent last month after falling 0.4 percent in October. But the PPI declined 1.1 percent in the 12 months through November after sliding 1.6 percent in October.

November marked the 10th straight 12-month decrease in the index. Dollar strength and continued declines in oil prices amid a glut and slowing global growth have dampened price pressures, leaving inflation running persistently below the Fed's 2 percent target.

"We maintain our conviction that dollar appreciation will weigh on the prices of core goods through the middle of next year," said Rob Martin, an economist at Barclays in New York.

Last month, overall retail sales increased only 0.2 percent as automobile sales fell and cheaper gasoline weighed on receipts at service stations. Retail sales edged up 0.1 percent in October.

Auto sales slipped 0.4 percent last month, the largest decline since June, after falling 0.3 percent in October. Though automakers reported strong sales in November, the units sold were slightly below October's levels.

Receipts at service stations fell 0.8 percent after decreasing 1.0 percent in October.

Elsewhere, sales at clothing stores shot up 0.8 percent, the largest increase since May. Sales at online retailers rose 0.6 percent and receipts at sporting goods and hobby stores increased 0.8 percent. Sales at electronics and appliance outlets advanced 0.6 percent.

The increase last month in discretionary spending suggested a fairly busy start to the holiday shopping season. However, receipts at building materials and garden equipment stores slipped 0.3 percent as did sales at furniture stores.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)