The slump in consumer sentiment and persistently weak inflation
reported on Friday are in stark contrast with a tightening labor
market. Sentiment was likely undermined by recent stock market
volatility amid worries over China's slowing economy, while a strong
dollar is dampening price pressures.
"The sharp deterioration in consumer confidence and the re-emergence
of the disinflationary thrust in goods prices will factor
prominently in the Fed's deliberations next week, and both are
likely to add to the case for caution as they consider raising
rates," said Millan Mulraine, deputy chief economist at TD
Securities in New York.The University of Michigan said its consumer
sentiment index fell to 85.7 early this month, the lowest since
September last year, from a reading of 91.9 in August.
The survey's gauge of consumer expectations also dropped to a
one-year low, as households expected slower growth overseas to hit
the U.S. economy. Consumers' expectations for current and future
personal finances also took a knock.
But even as households took a dim view of the economy's outlook,
there were only mild declines in sentiment towards motor vehicle and
home purchases.
"We look to the final September survey results for any evidence of
significant pass-through from weaker sentiment to actual purchasing
activity, but expect robust income and job growth to outweigh these
factors in actual consumption data," said Jesse Hurwitz, an
economist at Barclays in New York.
In a separate report, the Labor Department said its producer price
index was unchanged in August after gaining 0.2 percent in July. The
drag on producer prices from lower crude oil prices and a buoyant
dollar was offset by an increase in margins for apparel, footwear
and accessories retailing.
In the 12 months through August, the PPI fell 0.8 percent after a
similar decline in July. It was the seventh straight 12-month
decrease in the index.
FED'S CONUNDRUM
The ebb in consumer sentiment and benign price pressures despite a
rapidly tightening labor market pose a dilemma for Fed officials who
are contemplating raising rates for the first time in nearly a
decade.
Though job openings are at a record high and the unemployment rate
is at a 7-1/2-year low, wage gains have been lackluster. Tepid wage
growth and dollar strength have combined to keep inflation well
below the Fed's 2 percent target.
The U.S. central bank's policy-setting committee meets on Sept.
16-17. The likelihood of a lift-off in the Fed's benchmark overnight
interest rate has been diminished by recent financial market
turbulence.
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Stocks on Wall Street were trading lower on the data. Investor
sentiment was also hurt after Goldman Sachs said crude oil prices
could fall to as low as $20 a barrel, citing oversupply and concerns
over China's economy.
The dollar was little changed against a basket of currencies and
prices for U.S. government debt rose.
Producer inflation is likely to remain muted in the near term after
a report on Thursday showed import prices fell 1.8 percent in
August, the largest drop since January.
The index for final goods fell 0.6 percent last month, with a 7.7
percent decline in gasoline prices accounting for nearly two-thirds
of the drop. There also were decreases in the cost of jet fuel,
grains, light motor trucks, and iron and steel scrap.
The volatile trade services component, which mostly reflects profit
margins at retailers and wholesalers, shot up 0.9 percent in August
after rising 0.4 percent in the prior month.
Almost half of the increase in August was attributed to a 7.0
percent surge in margins for apparel, footwear and accessories
retailing.
A key measure of underlying producer price pressures that excludes
food, energy and trade services edged up 0.1 percent in August after
rising 0.2 percent in July.
The dollar's 17.5 percent rise against the currencies of the United
States' main trading partners since June 2014 is restraining gains
in the so-called core PPI. Core PPI was up 0.7 percent in the 12
months through August.
(Reporting by Lucia Mutikani, additional reporting by Gertrude
Chavez-Dreyfuss in New York; Editing by Paul Simao and Chizu
Nomiyama)
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