Strong retail sales report pushes back against recession fears

Federal Reserve chairman Janet Yellen was optimistic about the U.S. economy during her congressional appearances on Wednesday and Thursday, and as if on cue, on Friday the Commerce Department reported a strong rebound in consumer spending in January.
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Federal Reserve chairman Janet Yellen was optimistic about the U.S. economy during her congressional appearances on Wednesday and Thursday, and as if on cue, on Friday the Commerce Department reported a strong rebound in consumer spending in January.

Recession fears have flared, but they mostly have stemmed from the ongoing turmoil in financial markets. The major market indexes ended a five-session losing streak on Friday as the Dow Jones industrial average and the Standard & Poor’s 500 index each gained 2 percent and the Nasdaq composite index rose 1.7 percent, but stocks generally have been slumping since 2016 began.

When economy watchers follow consumers’ spending habits, they get a different vibe from the one that stock investors are sending. The Commerce Department said Friday that U.S. retail sales — excluding automobiles, gasoline, building materials and food services — rose 0.6 percent last month after a 0.3 percent decline in December.

Reuters said the so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had predicted that core retail sales would increase 0.3 percent in January.

"The markets may have decided that the U.S. is headed for recession, but obviously no one told U.S. consumers," Paul Ashworth, chief economist at Capital Economics in Toronto, told Reuters.

On Wednesday Yellen told the House Financial Services Committee that the United States appears to be surviving the turbulence from slowing global growth and the roiling financial markets.

“We've not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching,” she told the committee.

Yellen doesn’t think the Fed, which raised interest rates in December for the first time in more than nine years, will be forced to backtrack on that step, although she did say the central bank will consider negative interest rates, which would be an extraordinary step, if economic conditions force its hand.

That said, Yellen clearly does not believe such action will be needed. Although U.S. financial conditions have worsened a bit since December, she said Fed policymakers expect “that with gradual adjustments in the stance of monetary policy” the U.S. economy will continue to grow moderately and the job market will continue to strengthen, the Los Angeles Times reported.

The coming week will deliver important new information about the economy’s performance in January. On Wednesday the Commerce Department will report on housing starts and building permits. Economists’ consensus forecast is that groundbreaking rose slightly — to a seasonally adjusted annual pace of 1.18 million units — from 1.15 million in December.

December marked the ninth month in a row in which starts were above 1 million. That’s the largest such streak since 2007.

Fortune said the Labor Department is expected to report Wednesday that its Producer Price Index dropped 0.2 percent last month amid the ongoing decline in oil prices and the strong U.S. dollar.

Also on Wednesday the Fed will release the minutes of its rate-setting committee’s late-January meeting. Yellen told Congress during her appearances last week that she continues to believe the central bank will raise rates gradually this year despite the potential for the stock market’s problems to spill into the broad economy. We’ll see what other members of the Federal Open Market Committee had to say at the January meeting.

On Friday, we will get readings on the Consumer Price Index and core CPI from the Labor Department. The CPI fell 0.1 percent in December and is thought to have repeated that performance in January.

If prices — oil prices, in particular — continue to fall, will consumers continue to spend? The recreational marine industry and the rest of America’s manufacturers can only hope they do.

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