U.S. Economy Starting 2016 on Solid Footing
Consumer spending, GDP revision suggest growth path is improving
Consumer spending grew in January at the fastest clip in eight months, new data showed Friday, as a strong job market and robust wage gains boosted Americans’ propensity to spend. Inflation also ticked higher, a positive sign for Federal Reserve officials considering whether the U.S. economy can withstand higher interest rates.
The pickup followed other improvement across the economy in January including stronger retail sales and home purchases. A report Thursday showed new orders for big-ticket durable goods also increased last month following their worst annual performance since the recession, suggesting the U.S. manufacturing sector could be on the mend.
Resilient U.S. economic data in recent weeks contrasts with volatility in global financial markets, unsettled by concerns over China’s economic slowdown and steep declines in commodity prices. Fears about jitters translating into a U.S. recession have yet to hit many underlying economic fundamentals.
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- U.S. Consumer Spending Accelerates in January
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- Signs of Manufacturing Recovery Emerge
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A key gauge of consumer confidence slipped in January and again in mid-February, but has partially rebounded since the middle of the month, according to the University of Michigan final consumer sentiment index, a sign of slower but still-steady economic growth.
On Friday, the Commerce Department said personal spending, which measures outlays on everything from smart phones to doctor visits, rose 0.5% in January from the prior month. Americans’ pretax earnings from salaries and investments increased at the same pace.
Separately, the department said gross domestic product advanced at a 1% seasonally adjusted annual rate in the fourth quarter, revising up its earlier estimate of 0.7%. That followed annualized growth of 2% in the third quarter and 3.9% in the second.
Friday’s release also showed the Federal Reserve’s preferred inflation measure, the price index for personal consumption expenditures, up 1.3% from a year earlier, firming from an annual inflation gain of 0.7% in December. Inflation has run below the Federal Reserve’s 2% inflation target for nearly four years.
Excluding volatile food and energy costs, so-called core prices were up 1.7% from a year earlier in January--the strongest increase since July 2014. Core inflation has risen faster than the Federal Reserve predicted in December, when it decided to raise the benchmark federal-funds rate for the first time in nearly a decade.
Core inflation is now higher than the Fed expected it to be at the end of this year, a development that could give the central bank confidence the U.S. economy can cope with less central-bank support to spur spending and investment.
Fed funds futures, used by investors and traders to place bets on central-bank policy, showed that they now see a roughly 50-50 chance of a rate increase at the Fed’s December policy meeting, according to data from CME Group. The probability was around 20% Thursday. Earlier this month the odds had been near zero despite the Fed’s onetime expectation that it would raise rates four times this year.
Developments in the U.S. contrast sharply with economic data and monetary policy in other advanced economies. Policy makers in Europe and Japan have been pushing interest rates down to negative levels and buying assets in a bid to fuel growth and combat weak inflation.
For the U.S., Friday’s GDP revisions confirmed that trade and business investment were drags on the economy during the final three months of last year, a clear sign that the U.S. hasn’t been immune from global weakness.
The improvement in overall economic growth in the fourth quarter was largely due to the fact that companies pulled back on inventory less than originally expected. Economists cautioned that a faster rate of inventory accumulation could hinder first-quarter growth as companies take longer to work through their well-replenished stockpiles.
“While this is good news for the fourth quarter, it is bad news for early 2016; inventories are a bit higher than businesses would like, and so they will be adding less to them over the next few months, weighing on economic growth,” said PNC economist Gus Faucher.
Households consumed less than originally estimated in the final quarter of 2015. The updated reading for personal consumption rose 2% in the fourth quarter, down from an initial estimate of 2.2% and below the third quarter’s 3% growth rate.