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Consumer spending hits four-year high thanks to holiday splurge

In the last three months of 2010 consumer spending reached its highest rate since early 2006. Spending should cool a bit, but the report is a positive sign for the economic recovery.

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A shopper in Waco, Texas, shops for a holiday gift at the Family Dollar store on Dec. 14, 2010. Consumer spending rose sharply in December.

Tony Gutierrez/AP

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A holiday-season rush pushed consumer US spending to its strongest quarterly gain in more than four years – a display of confidence that adds to other recent signs that an economic recovery is gathering strength.

Spending grew at an annualized pace of 4.4 percent for the final three months of last year, the best showing since the first quarter of 2006, the Commerce Department reported Monday.

In part, the gains reflected an end-of-year retail splurge. Consumer spending rose in December by 0.7 percent from the prior month, which outpaced a 0.4 percent gain in personal income for the month.

But in general, both consumer incomes and spending are on an upward path, and the income gains have increasingly been coming from private-sector wages rather than government-supported programs.

"The growth here was supported by broad-based gains in wages and salaries," said economists Mark Vitner and Tim Quinlan of Wells Fargo Securities in an analysis of the new numbers. By contrast, "at the outset of this recovery, much of the income growth was concentrated in transfer payments, which includes categories such as social-security payments and unemployment benefits."

That bodes well for the notion, embedded in many professional forecasts, that the economy is on track for modest self-sustaining growth – with rising consumer demand nudging businesses toward new hiring, which in turn adds new income for consumers to spend.

But most economists don't predict a continuation of annualized spending growth of 4.4 percent.

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