Consumer spending trend bodes well for moderate growth

Week to week during the year, economy watchers get pieces of the puzzle — retail sales one week and home sales another — but nothing at least temporarily settles arguments about the direction of the nation the way the quarterly report on gross domestic product does.

Week to week during the year, economy watchers get pieces of the puzzle — retail sales one week and home sales another — but nothing at least temporarily settles arguments about the direction of the nation the way the quarterly report on gross domestic product does.

And the state of the U.S. economy, as it ended 2015, was better than initially thought, as the Commerce Department’s third estimate of fourth-quarter GDP revealed late last week.

Previously reported 1.0 percent growth became 1.4 percent in the latest reading and it shows that the economy had some underlying strength as the new year began.

"The consumer is back in the driver's seat,” Chris Rupkey, chief economist at MUFG Union Bank in New York, told Reuters. “There is no sign of recession in these data, so this will put a smile on Fed officials' faces and argues for their policy of gradual interest rate normalization to continue."

"The final look at the 2015 GDP growth underlines the key dynamics of the economy: Consumer spending and housing are keeping the economy going despite major drags from net exports, capital spending and an inventory cycle," Nariman Behravesh, chief economist at HIS, told Agence France Presse.

The previous year had begun with much more promise. The economy grew 4.6 percent in the second quarter and 5 percent in the third quarter, so some analysts reviewing fourth-quarter figures preferred to focus on corporate profits and didn’t like what they saw. Profits fell 11.5 percent for the quarter and were lower by 3.1 percent, or $64 billion, for 2015 as a whole.

Bloomberg said weak productivity, rising labor costs and a plunge in energy prices are keeping earnings down.

“If profits remain depressed, the prospects for [capital expenditures] and hiring will come under greater pressure,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, wrote in a research note, Bloomberg said.

The latest readings on the 2016 housing market were mixed last week. Home resales fell 7.1 percent in February. Supply remained low and prices were high, nudging would-be buyers out of the market.

The National Association of Realtors said sales fell to a seasonally adjusted annual rate of 5.08 million, down from 5.47 million in January. Despite the drop, February sales were still 2.2 percent above those of a year earlier. The decline followed a strong 2016 start in January.

“The overall demand for buying is still solid entering the busy spring season, but home prices and rents outpacing wages and anxiety about the health of the economy are holding back a segment of would-be buyers,” Lawrence Yun, the NAR’s chief economist, said in a statement.

Conversely, new-home sales showed a modest rebound in February. The Commerce Department said sales rose 38.5 percent in the West, a dramatic gain that offset weaknesses elsewhere and left sales nationally with a 2 percent increase, to a seasonally adjusted annual rate of 512,000 units.

"Existing and new-home prices are rising quickly, and that's really taking a bite out of housing affordability. New and existing-home inventories are very lean. That can hurt sales," Ryan Sweet, senior economist at Moody's Analytics in Westchester, Pa., told Reuters. "Spring sales should be decent, but won't be as good as they could have been if there was more inventory on the market and affordability was a little bit stronger."

Said Sophia Kearney-Lederman, an economic analyst at FTN Financial in New York, “We expect the housing market to continue to be a moderate but unremarkable contributor to growth for the remainder of 2016.”

Yesterday the Commerce Department said consumer spending rose only slightly in February. The department downwardly revised its January reading in a report that showed how cautious people were.

Consumer spending rose 0.1 percent in February and January, the government said. The previously reported January gain was 0.5 percent. Personal incomes rose 0.2 percent, which shows that consumers were saving money.

“There’s still this sense of more of the same right now — the consumer is still chugging along, not really strong but not terribly weak, either,” Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Fla., told Bloomberg. “Things are a little bit softer than we’d hope to be, but still consistent with the economy growing.”

Inflation moderated in February as a price index for consumer spending slipped 0.1 percent after rising by the same percentage in January. Reuters reported that in the 12 months through February, the Personal Consumption Expenditures Price Index increased 1.0 percent after rising 1.2 percent in January.

Excluding food and energy, prices gained 0.1 percent after rising 0.3 percent in January. In the 12 months through February, the so-called core PCE price index increased 1.7 percent after a similar increase in January. Reuters said the core PCE is the Federal Reserve’s preferred inflation measure and is running below its 2 percent target.

The slowdown in the monthly core PCE reading comes after Fed Chairman Janet Yellen recently expressed skepticism about the sustainability of gains in core inflation measures. Yellen will speak about the economy at 11:30 a.m. today before the Economic Club of New York.

About 90 minutes before her address we will get The Conference Board’s Consumer Confidence Index for March. The consensus forecast is that the index rose two points, to 94.

The gyrating financial markets were a concern for respondents last month. Stock prices since have stabilized and improved, although the markets broke a five-week winning streak last week. The three major U.S. stock indexes posted losses in a narrow range of 0.5 percent to 0.7 percent.

On Friday, we will see the final University of Michigan’s Consumer Sentiment Index for March. Will it match the snapshot of consumer mood from today’s Conference Board report?

Perhaps it will, but the most important news of the day will be the March jobs figure. Consumers appear to be in a mood to spend. If significantly more people find jobs, it would brighten the economy’s spring prospects.


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