Strong US consumer spending counters recession fears

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.