U.S. consumers increased their spending at retail businesses in December, buying more autos, furniture and clothing.
Steady job growth and lower gas prices kept consumers shopping for the holidays, despite worries about potentially tax increases.
The Commerce Department said Tuesday that retail sales rose 0.5 per cent in December from November, slightly better than November's 0.4 per cent increase and the best showing since September.
A 1.6 per cent jump in sales of autos and auto parts led all categories. Car companies closed out their best sales year since 2007.
Total retail spending was even stronger when factoring out a drop in gas prices. Excluding a 1.6 per cent decline in gas station sales, retail spending increased 0.8 per cent.
The December increase suggests consumers were not too worried about tense negotiations to resolve the fiscal cliff.
Congress and the White House ultimately reached a deal on Jan. 1 that prevented income taxes from rising for most households.
Still, retail sales are likely to weaken in the first half of 2013 because lawmakers and President Barack Obama allowed a two-year reduction in Social Security payroll taxes to lapse.
Most Americans will start seeing less money in their paychecks this month. A person earning $50,000 a year will see take-home pay shrink by roughly $1,000 in 2013.
That's likely to slow consumer spending and weigh on overall economic growth.
"Nothing in today's data does anything to dispel the notion that consumer spending the first half of 2013 should be quite weak," said Dan Greenhaus, chief global strategist at BTIG.
"The smaller paychecks will be anything but a welcome development."
The retail sales report is the government's first look this year at consumer spending, which drives roughly 70 per cent of economic activity.
Despite the December gain, 2012 ended as the worst year for retail sales growth since the Great Recession ended more than three years ago.
Retail sales rose just 5.2 per cent last year. That's slower than the 7.9 per cent growth in 2011 and 5.6 per cent growth in 2010.
Earlier this month, major retailers reported that a last-minute surge in spending helped salvage the crucial holiday shopping season.
Retailers can often make as much as 40 per cent of their annual revenue during the final two months of the year.
U.S. growth probably slowed
In addition to strong car sales, the government report showed consumers spent 1.4 per cent more at furniture stores, 1.4 per cent more at health and personal care shop, and one per cent more at specialty clothing stores.
Sales were flat at general merchandise stores, a category that department stores such as Macy's and big retailers such as Wal-Mart and Target.
But that followed a 0.8 per cent decline in November.
The economy grew at an annual rate of 3.1 per cent in the July-September quarter.
But most economists believe growth slowed to below two per cent in the October-December period, in part because of expected weakness in consumer spending.
Income growth remains weak, constraining the amount that consumers can devote to increased spending.
Job growth has been steady, although unemployment is still high at 7.8 per cent. In December, employers added 155,000 jobs, roughly matching the monthly average in 2011 and 2012.
The economy has shown some signs of improvement. The once-battered housing market is recovering, which should lead to more construction jobs in the coming months.
A gauge of U.S. service firms' business activity expanded in December by the most in nearly a year.