Increased Spending Called Sign of Robust Economy

Consumer spending increased strongly in November while inflation remained moderate, the government said Friday, presenting reassuring signs that the economy remains robust despite the shock of the stock market crash.

Purchases of cars and other durable goods constituted the bulk of the healthy 0.5% rise in consumer spending, the Commerce Department said, signaling consumer willingness to make substantial purchases soon after the late October plunge in stock prices. It was the first increase in spending since August.

“The crash has done virtually nothing to the economy,” said Allen Sinai, chief economist for Shearson Lehman Bros. in New York. “In our history it has taken much more financial trouble than the initial bear market decline to do the economy in.”

Consumer prices rose 0.3%, the Labor Department said, principally because of increases in energy costs, leaving inflation running at an annual rate of 4.7% for 1987. That is sharply higher than last year’s 1.1% increase, but still in a range regarded as moderate.

At the White House, spokesman Marlin Fitzwater said: “These reports demonstrate that the rate of inflation remains under control, despite the increases experienced at the beginning of the year.”

Economists were even more optimistic about price movements in the future, saying this week’s 14% plunge in the price of crude oil, caused by dissension among members of the Organization of Petroleum Exporting Countries, should push the inflation rate lower in the first half of next year, far outweighing the inflationary effect of a weak dollar.

“Through the year we’ve had decelerating inflationary pressures, and the decline in oil prices will continue to dampen these pressures into 1988,” said Stacy Kottman, a specialist in price movements at Georgia State University.

Some analysts had predicted the market crash would curb inflation by discouraging spending and thus slowing the growth of the economy. While economists said any effect of the crash on consumer prices would not appear until next year, they also said the gain in consumer spending would bode well for vigorous economic growth.

” . . . Pessimism is not called for either by general investors or the Federal Reserve,” said Roger Brinner of Data Resources Inc., an economic forecasting firm in Lexington, Mass. Brinner said he thought the consumer spending surge, together with the decline in oil prices, would boost the bond market and could push interest rates down.

Reassuring Consumers

“If we do reassure consumers through lower interest rates, then the U.S. will have neatly avoided a recession,” Brinner said.

The gain in consumer spending followed declines of 0.2% in September and October. The sharp 1.5% increase in August was largely fueled by widespread discounting on automobiles.

In November, purchases of durable goods rose at an annual rate of $10.2 billion after declining at a rate of $24.7 billion in October, while the purchases of non-durable goods continued to edge down slightly. Spending on services rose by $6.6 billion after an even higher $19 billion increase in October.

Though economists agreed the spending increase was encouraging, some warned that ill-effects of the market crash may still lie in the future.

“It may well be that after Christmas people will start to take a second look and get more nervous,” said Kathleen Cooper, chief economist for Security Pacific National Bank in Los Angeles.

Personal Income Dips

In another report, the Commerce Department said personal income in November declined by 0.4%, its steepest rate in 15 years, but the drop was caused entirely by a reduction in farm subsidy payments, which are concentrated in October and almost non-existent in November. Without the swing in farm incomes, personal incomes actually rose by 0.7%, which economists said showed that income was continuing to increase at a reasonable rate.

November’s 0.3% increase in consumer inflation followed a 0.4% rise in October.

The declining value of the dollar has made imported goods more expensive, although analysts said the inflationary impact has been limited because many importers have been absorbing higher costs rather than risk losing customers. They said the recent plunge in the price of oil may further mitigate the impact of the weak dollar as lower energy costs worldwide reduce the price of imports.

In November, the energy costs measured in the index rose 0.8% after significant declines in September and October. But Labor Department analyst Patrick Jackman said much of that increase was the result of statistical seasonal adjustments rather than actual increases paid by consumers. Food costs rose 0.1%.

The November report moved the overall consumer price index, which is not seasonally adjusted, to 345.8, up 0.5 points, or 0.1% from October. This means that a basket of consumer goods costing $100 in 1967, the base year of the index, now costs $345.80.