By Lucia Mutikani
WASHINGTON (Reuters) - Consumer sentiment hit a five-month high heading into the end of the year and spending notched its strongest month since the summer, the latest signs of sustained vigor in the economy that are fostering hopes of a strong 2014.
Consumer spending rose in November at the fastest pace since June and an upbeat sentiment reading for December suggests consumers will keep shopping despite tepid income growth.
"Next year is shaping up to be the better tomorrow we have wanted to see ever since the recession ended almost five years ago," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Consumer spending rose 0.5 percent after gaining 0.4 percent in October, the Commerce Department said on Monday. The rise matched economists' expectations and was the seventh consecutive monthly increase.
When adjusted for inflation, consumer spending, which accounts for more than two-thirds of U.S. economic activity, also increased 0.5 percent, the most since February 2012.
The data indicates that spending in the last three months of 2013 will almost certainly accelerate from the third quarter's 2 percent annual rate, despite signs that last-minute Christmas sales may have been disappointing.
Some economists raised their fourth-quarter economic growth estimates by as much as two tenths of a percentage point to as high as a 2.4 percent annual pace on the November figures.
Though income growth remains lukewarm, rising only 0.2 percent last month, improving household balance sheets as stock and house prices rise are propping up spending.
Separately, the Thomson Reuters/University of Michigan's index of consumer sentiment jumped to 82.5 this month, the highest reading since July. It improved from 75.1 in November and was unchanged from a preliminary reading released earlier this month.
U.S. stocks touched all-time highs as investors bid up shares of Apple Inc, which struck a distribution deal for its iPhones with China Mobile Ltd. Prices for U.S. government debt slipped in light holiday trade, and the dollar fell against a basket of currencies.
GROWTH NOT FANNING INFLATION
The reports added to other fairly strong data, such as employment and industrial production, in suggesting the economy retained some of its third-quarter momentum and was poised for faster growth in 2014.
They also fit in with the Federal Reserve's upbeat view on growth, which prompted the central bank to announce last week that it would start trimming its monthly bond purchases.
The U.S. economy grew at a 4.1 percent clip in the July-September period, the fastest pace in nearly two years, after expanding at a 2.5 percent rate in the second quarter.
International Monetary Fund Managing Director Christine Lagarde said the international lender would raise its growth forecast for the world's largest economy next year. The IMF forecast in October that the U.S. economy would expand 2.6 percent in 2014.
Despite the signs of strength, inflation remains benign. A price index for consumer spending was unchanged for a second straight month. Over the past 12 months, prices rose 0.9 percent. The index had gained 0.7 percent in October.
Excluding food and energy, prices rose 0.1 percent for a fifth straight month. These so-called core prices were up 1.1 percent from a year ago.
Both inflation measures remained well below the Fed's 2 percent target, suggesting the central bank could keep interest rates near zero for a while, even as it trims bond purchases.
"Stronger growth supports Fed tapering but modest inflation means the pace of tapering will be slow," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
Some economists said anemic wage growth could dampen spending in the months ahead and they noted that households were cutting back on saving to fund purchases.
The saving rate - the percentage of disposable income households socked away - fell to a nine-month low.
Others, however, saw that as a sign of growing confidence.
"Consumers look to be growing more confident in their income prospects," said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "We look for income and spending to rise more quickly over the coming year as the labor market and consumer confidence strengthen further."
(Reporting by Lucia Mutikani, additional reporting by Ryan Vlastelica in New York; Editing by Krista Hughes)