Hurricane Harvey curbs U.S. consumer spending; inflation
muted
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[September 30, 2017]
By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer
spending barely rose in August likely as Hurricane Harvey weighed on
auto sales, while annual inflation increased at its slowest pace in
nearly two years, pointing to a moderation in economic growth in the
third quarter.
The weak report from the Commerce Department on Friday did little to
change expectations that the Federal Reserve would raise interest rates
in December. Fed Chair Janet Yellen said this week the U.S. central bank
needed to continue gradual rate hikes despite uncertainty about the path
of inflation.
"We think current economic conditions are heavily impacted by the effect
of the recent hurricanes," said Chris Rupkey, chief economist at MUFG in
New York. "The Fed will rightly look over any soft patch for economic
growth in the third quarter."
Consumer spending, which accounts for more than two-thirds of U.S.
economic activity, edged up 0.1 percent last month also likely as
unseasonably mild temperatures in some parts of the country reduced
demand for utilities.
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The gain, which followed a 0.3 percent increase in July, was in line
with economists' expectations. The government said the data reflected
the effects of Hurricane Harvey.
However, it could not separately quantify the total impact of Harvey on
the data. The government made adjustments to estimates where source data
were not yet available or did not fully reflect the effects of the
storm.
Inflation remained muted in August, with the personal consumption
expenditures (PCE) price index excluding food and energy rising 0.1
percent. The so-called core PCE has advanced by the same margin for four
straight months.
As a result, the annual increase in the core PCE price index slowed to
1.3 percent in August after advancing 1.4 percent in July. That was the
smallest year-on-year increase since November 2015. The core PCE is the
Fed's preferred inflation measure and has been undershooting its 2
percent target since 2012.
The Fed signaled last week it anticipated one more interest rate
increase by the end of the year. It has increased borrowing costs twice
this year. Financial markets are pricing a roughly 76 percent
probability of an interest rate hike in December, according to the CME
FedWatch tool.
The dollar was little changed against a basket of currencies, while
prices for U.S. Treasuries fell. Stocks on Wall Street were trading
higher.
"The Fed appears poised to look through surprises in inflation data over
the next few months," said Ellen Zentner, chief U.S. economist at Morgan
Stanley in New York.
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When adjusted for inflation, consumer spending slipped 0.1 percent in
August, the first drop since January.
HURRICANES SLOWING GROWTH
The report was the latest suggestion that Harvey, together with
Hurricane Irma, would dent economic growth in the third quarter. The
economy grew at a brisk 3.1 percent annualized rate in the second
quarter, with consumers doing the heavy lifting.
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![](../images/093017pics/busine73.jpg)
New cars are shown for sale at a Chevrolet dealership in National
City, California, U.S., June 30, 2017. REUTERS/Mike Blake/File Photo
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Harvey, which tore through Texas in late August, has undercut industrial
production, homebuilding and home sales. Further declines are expected after
Irma slammed Florida in early September.
Economists estimate the storms could slice off as much as six-tenths of a
percentage point from third-quarter GDP growth. The Atlanta Fed is forecasting
the economy growing at a 2.3 percent rate in the July-September quarter.
However, a pick-up in output is expected in the fourth quarter as communities
ravaged by the hurricanes rebuild.
Segments of the economy not impacted by the storms are pulling ahead. In a
separate report on Friday, the Institute for Supply Management Chicago said its
MNI Chicago business barometer rose to a reading of 65.2 this month from 58.9 in
August. The second-highest reading in more than three years partly reflected a
jump in order backlogs to a 29-year high.
A third report showed consumer sentiment holding at lofty levels this month.
That offers hope that consumer spending will accelerate in the coming months,
though sluggish wage growth remains a concern.
Consumer spending in August was held back by a 1.1 percent decline in outlays on
long-lasting manufactured goods. The Commerce Department said spending on new
motor vehicles was the leading contributor to the drop in the so-called durable
goods.
Auto manufacturers reported that Hurricane Harvey had impacted on sales in the
last week of August.
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Healthcare spending boosted services outlays, which rose 0.3 percent in August.
Harvey also probably impacted on income in August. Personal income rose 0.2
percent last month after increasing 0.3 percent in July. Wages were unchanged
after climbing 0.5 percent in July.
"There was zero wage growth nationally last month as workers idled, or
dislocated, from the hurricane could not work," said Scott Anderson, chief U.S.
economist at Bank of the West in San Francisco.
With wages stagnant, consumers dipped into savings to fund spending. Savings
fell to an eight-month low of $522.9 billion in August from $524.8 billion in
the prior month.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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