Monday 24 October 2016

Boost for Fed as consumer spending offsets business gloom

Lucia Mutikan

Published 30/08/2016 | 02:30

US Federal Reserve Chair Janet Yellen
US Federal Reserve Chair Janet Yellen

US consumer spending increased for a fourth straight month in July amid strong demand for cars, pointing to a pick-up in economic growth that could allow the Federal Reserve to raise interest rates this year.

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The Commerce Department said yesterday that consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.3pc last month after an upwardly revised 0.5pc gain in June.

July's increase was in line with economists' expectations.

Spending was previously reported to have risen 0.4pc in June. When adjusted for inflation, consumer spending also gained 0.3pc in July after advancing 0.4pc in June.

Consumer spending appears to have retained some of its momentum from the second quarter, when it grew at a 4.4pc annual rate, the fastest in nearly two years.

That jump helped to mitigate some of the impact of a sharp inventory drop and prolonged business investment downturn. The US economy grew at a lacklustre 1.1pc growth rate in the second quarter. That was slightly down from the 1.2pc rate reported last month.

The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8pc pace in the first quarter. It grew 1.0pc in the first half of 2016.

The revision to second-quarter GDP growth was in line with economists' expectations.

The US economy has struggled to regain momentum since output started slowing in the last six months of 2015, which puts it in danger of stalling.

While data so far for the third quarter has been mixed, a strong labour market should continue to support consumer spending and underpin growth in the coming quarters. Output will also likely get a boost as businesses restock warehouses after liquidating inventories in the second quarter

Meanwhile, July's consumer spending data added to reports on the goods trade deficit, industrial production, durable goods orders and residential construction that have pointed to an acceleration in economic growth early in the third quarter.

The Atlanta Fed is estimating third-quarter GDP growth rising at a 3.4pc annual pace.

Consumer spending is being driven by a tightening labour market, which is steadily lifting wages. Rising home values and stock market prices, which are boosting household wealth, are also supporting consumption.

Fed Chair Janet Yellen told a gathering of global central bankers last Friday that she believed the case for raising interest rates had been strengthened in recent months by the "solid performance of the labour market and our outlook for economic activity and inflation."

Last month, there was little sign of inflation pressures even as consumer spending firmed.

The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1pc after a similar gain in June. In the 12 months through July the core PCE increased 1.6pc. It has risen by the same margin every month since March. The core PCE is the Fed's preferred inflation measure and is running below its 2pc target.

Consumer spending last month was lifted by a 1.6pc surge in purchases of long-lasting manufactured goods such as cars. Spending on services rose 0.4pc, but outlays on non-durable goods slipped 0.5pc.

Personal income increased 0.4pc in July after rising 0.3pc in June. Wages and salaries advanced 0.5pc. (Reuters)

Irish Independent

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