Strong US consumer spending counters recession fears

Reuters . Washington

US 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 US is headed for recession, but obviously no one told US 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 per cent last month after an unrevised 0.3 per cent 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 retail sales increasing 0.3 per cent last month.
US 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 US Treasury debt fell, while the dollar 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 US 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 US 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 two-thirds of US economic activity and is being supported by a tightening labor market, which is starting to lift wages. Savings, which hit a three-year 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 per cent annual pace.

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