Strong US con­sumer spend­ing coun­ters re­ces­sion fears

The Pak Banker - - BUSINESS -

U.S. con­sumer spend­ing re­gained mo­men­tum in Jan­uary as house­holds ramped up pur­chases of a va­ri­ety of goods, in a hope­ful sign that eco­nomic growth was pick­ing up af­ter slow­ing to a crawl at the end of 2015.

But the out­look for con­sumer spend­ing was tem­pered by an­other re­port on Fri­day show­ing sen­ti­ment among house­holds ebbed in early Fe­bru­ary. Still, the in­crease in con­sumer spend­ing last month un­der­scored the econ­omy's re­silience and chal­lenged the view that a re­ces­sion was loom­ing. "The mar­kets may have de­cided that the U.S. is headed for re­ces­sion, but ob­vi­ously no one told U.S. con­sumers," said Paul Ash­worth, chief econ­o­mist at Cap­i­tal Eco­nom­ics in Toronto.

The Com­merce Depart­ment said retail sales ex­clud­ing au­to­mo­biles, gaso­line, build­ing ma­te­ri­als and food ser­vices in­creased 0.6 per­cent last month af­ter an un­re­vised 0.3 per­cent de­cline in De­cem­ber. Th­ese so-called core retail sales cor­re­spond most closely with the con­sumer spend­ing com­po­nent of gross do­mes­tic prod­uct. Econ­o­mists had fore­cast core in­creas­ing 0.3 per­cent last month.

U.S. stocks, which had been ag­gres­sively sold this week on con­cerns the econ­omy was head­ing into re­ces­sion, ral­lied on the data. Mar­ket sen­ti­ment was also buoyed by a re­bound in oil prices from 12-year lows. Prices for U.S. Trea­sury debt fell, while the dol­lar .DXY rose against a bas­ket of cur­ren­cies. Though signs of firm­ing con­sumer spend­ing are likely to be wel­comed by Fed­eral Re­serve of­fi­cials, the stock mar­ket tur­moil and tame in­fla­tion en­vi­ron­ment make it un­likely the U.S. cen­tral bank will raise in­ter­est rates next month. Rate hike prospects for the rest of the year have also di­min­ished.

The Fed raised its short-term in­ter­est rate in De­cem­ber, the first in­crease in nearly a decade. "From the Fed's per­spec­tive, any fur­ther ev­i­dence of the U.S. econ­omy weath­er­ing the mar­ket tur­moil at the start of the year is con­fir­ma­tion the Fed should con­tinue to fo­cus on the longer run and ig­nore short-term dis­rup­tions," said Lindsey Piegza, chief econ­o­mist at Stifel Fixed In­come in Chicago.

Con­sumer spend­ing ac­counts for more than

retail

sales two-thirds of U.S. eco­nomic ac­tiv­ity and is be­ing sup­ported by a tight­en­ing la­bor mar­ket, which is start­ing to lift wages. Sav­ings, which hit a three­year high in 2015, are seen boost­ing fu­ture spend­ing. Growth in con­sumer spend­ing mod­er­ated in the fourth quar­ter. That, to­gether with weak ex­port growth due to the strong dol­lar, ef­forts by busi­nesses to sell in­ven­tory and cuts in cap­i­tal goods spend­ing by en­ergy firms, re­strained GDP growth to a 0.7 per­cent an­nual pace.

How­ever, weak re­ports on in­ven­to­ries, fac­tory or­ders and con­struc­tion spend­ing sug­gest the econ­omy grew at about a 0.2 per­cent rate in the last three months of 2015. In the wake of the retail sales re­port, fore­cast­ing firm Macroe­co­nomic Ad­vis­ers raised its first-quar­ter GDP growth es­ti­mate by one-tenth of a per­cent­age point to a 2 per­cent an­nual rate, and econ­o­mists at Mor­gan Stan­ley lifted their fore­cast to a rate of 1.5 per­cent from 1.2 per­cent.

A sep­a­rate re­port showed the Univer­sity of Michi­gan's con­sumer sen­ti­ment in­dex fell to a read­ing of 90.7 in early Fe­bru­ary from 92 in Jan­uary as house­holds wor­ried about the eco­nomic out­look. Con­sumers, how­ever, re­mained up­beat about their per­sonal fi­nan­cial sit­u­a­tion and an­tic­i­pated that low in­fla­tion would boost their pur­chas­ing power. Con­sumers ex­pect in­fla­tion to av­er­age 2.4 per­cent over the next five years, down from 2.7 per­cent in the Jan­uary sur­vey and the low­est read­ing since the ques­tion was added to the monthly sur­vey in 1990.

"The Fed closely watches the con­sumer sur­vey mea­sures of in­fla­tion ex­pec­ta­tions, and while to­day's data is only the pre­lim­i­nary re­port, it does in­crease the risk that the Fed's next hike is de­layed be­yond our cur­rent June call," said Michael Feroli, an econ­o­mist at JPMor­gan in New York.

In­fla­tion, which is cur­rently run­ning below the Fed's 2 per­cent tar­get, could re­main be­nign. The La­bor Depart­ment re­ported on Fri­day that im­port prices dropped 1.1 per­cent in Jan­uary af­ter a sim­i­lar de­crease in De­cem­ber. Im­port prices have de­clined in 17 of the last 19 months, re­flect­ing the ro­bust dol­lar and plung­ing oil prices. While lower oil prices have trans­lated into cheaper gaso­line, boost­ing house­hold dis­cre­tionary spend­ing, they are also weigh­ing on sales at ser­vice sta­tions.

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