WRAPUP 2-Strong U.S. consumer, business spending bolster Q4 growth picture

(Adds housing data, analyst comments, updates markets)

Consumer spending increases 0.6 percent in November

* Core PCE price index edges up 0.1 percent

* Savings fall to $426.2 billion from $466.9 billion

* Core capital goods shipments rise 0.3 percent in November

By Lucia Mutikani

WASHINGTON, Dec 22 (Reuters) - U.S. consumer spending accelerated in November and shipments of key capital goods orders increased for the 10th straight month, the latest signs of strong momentum in the economy as the year winds down.

But the bullish growth picture was dimmed somewhat as the reports on Friday also showed household savings dropped last month to their lowest level in more than nine years. Low savings could hurt consumer spending, though economists are optimistic wage growth will pick up next year.

They also see a modest lift from a $1.5 trillion tax cut package approved by the Republican-controlled U.S. Congress this week, in the largest overhaul of the tax code in 30 years.

The reports came on the heels of bullish data on the labor market, manufacturing and housing. Growth estimates for the October-December quarter are currently as high as a 3.3 percent annualized pace. The economy grew at a 3.2 percent rate in the third quarter.

"The economy is firing on both engines, consumer spending and business equipment purchases, as we head into the end of the year. Growth looks well balanced with consumers and businesses likely to carry the expansion into the record books in 2018," said Chris Rupkey, chief economist at MUFG in New York .

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6 percent last month after gaining 0.2 percent in October. Spending last month was buoyed by an increase in demand for motor vehicles, recreational goods and utilities.

When adjusted for inflation, consumer spending increased 0.4 percent in November after being unchanged the prior month. Personal income rose 0.3 percent last month, with wages increasing 0.4 percent.

With spending outpacing income, households dipped into their savings, which fell to $426.2 billion. That was the lowest level since August 2008 and was down from $466.9 billion in October. The saving rate dropped to a 10-year low of 2.9 percent from 3.2 percent in October.

In addition to savings, consumer spending is being driven by record household wealth, thanks to a booming stock market and rising home prices.

The stimulus package, which slashes the corporate income tax rate to 21 percent from 35 percent and offers tax cuts for individuals, is a major legislative victory for President Donald Trump. The Trump administration argues that the tax cut will boost both business and consumer spending though many economists only forecast a marginal gains.

The individual income tax cuts are skewed toward higher-income households, which economists say have a low propensity to consume. Economists also believe companies will use much of the windfall on share buy-backs and debt reduction.

The dollar was trading slightly higher against a basket of currencies. Prices for U.S. Treasuries were lower.


Despite the increase in spending, monthly inflation remained benign in November. The Federal Reserve's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose 0.1 percent in November after gaining 0.2 percent in October.

The so-called core PCE increased 1.5 percent in the 12 months through November, picking up from 1.4 percent in October. The core PCE has undershot the Fed's 2 percent target since mid-2012. Economists expect a tightening labor market to push up inflation next year. Inflation could determine the pace at which the Fed raises interest rates next year.

The U.S. central bank increased borrowing costs three times this year and has forecast three rate hikes in 2018.

In a second report on Friday, the Commerce Department said shipments of non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 0.3 percent after surging 1.3 percent in October.

Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. They have risen every month since February, the longest stretch since the series started in 1992.

The increase in core capital goods shipments over the last two months suggested a strong pace of increase in business spending on equipment in the fourth quarter. Business investment in equipment rose at its fastest pace in three years in the third quarter. But the momentum in business spending on equipment could be slowing. Core capital goods orders slipped 0.1 percent last month after rising 0.8 percent in October.

"Real equipment spending has been on a very strong run in recent quarters, but the recent cooling in the orders data signals that there could be some softening to come," said Daniel Silver, an economist at JPMorgan in New York.

In a third report, the Commerce Department said on Friday new home sales jumped 17.5 percent to a seasonally adjusted annual rate of 733,000 units last month. That was the highest level since July 2007. New home sales surged 26.6 percent from a year ago.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chizu Nomiyama)