U.S. consumer spending posts biggest gain in nearly two years; inflation
picks up
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[February 25, 2023] By
Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending increased by the most in
nearly two years in January amid a surge in wage gains, while inflation
accelerated, adding to financial market fears that the Federal Reserve
could continue raising interest rates into summer.
The report from the Commerce Department on Friday was the latest
indication that the economy was nowhere near a much-dreaded recession.
It joined data earlier this month showing robust job growth in January
and the lowest unemployment rate in more than 53 years.
"Clearly, tighter monetary policy has yet to fully impact consumers and
shows that the Fed has more work to do in slowing down aggregate
demand," said Jeffrey Roach, chief economist at LPL Financial in
Charlotte, North Carolina. "This report all but insures the Fed will
continue on its rate hiking campaign for a lot longer than markets
anticipated just a few weeks ago."
Consumer spending, which accounts for more than two-thirds of U.S.
economic activity, shot up 1.8% last month. That was the largest
increase since March 2021. Data for December was revised higher to show
spending dipping 0.1% instead of falling 0.2% as previously reported.
Economists polled by Reuters had forecast consumer spending rebounding
1.3%.
When adjusted for inflation, consumer spending increased 1.1%, also the
biggest gain since March 2021. The so-called real consumer spending had
declined in November and December.
Consumers boosted purchases of long-lasting manufactured goods like
motor vehicles, household furnishings and equipment as well as
recreational goods and vehicles. They also bought clothes. Goods outlays
rebounded 2.8%. Spending on services was also strong, rising 1.3% as
Americans frequented restaurants and bars. There were increases in
spending on healthcare, recreation and transportation services.
The overall surge in spending came as wages and salaries jumped 0.9%. An
8.7% cost of living adjustment, the biggest increase since 1981, for
more than 65 million Social Security beneficiaries offset a drop in
government social benefits. That reflected the expiration of the
extended child tax credit.
Spending was also likely flattered by difficulties ironing out seasonal
fluctuations from the data at the start of the year. Some economists
expect payback in February.
Nevertheless, the strong performance put consumer spending on a higher
growth path at the start of the first quarter. Consumer spending slowed
in the fourth quarter, with most of the loss in momentum happening in
the last two months of 2022.
The data together with another Commerce Department report showing new
home sales vaulting 7.2% in January prompted Goldman Sachs to raise its
first-quarter gross domestic product tracking estimate by 0.4 percentage
point to a 1.8% annualized rate. The economy grew at a 2.7% pace in the
fourth quarter.
Stocks on Wall Street fell. The dollar firmed against a basket of
currencies. U.S. Treasury yields rose.
MORE RATE HIKES
Financial markets have been on edge since the release of January's
blockbuster employment report.
[to top of second column] |
People shop at a Target store during
Black Friday sales in Chicago, Illinois, U.S., November 25, 2022.
REUTERS/Jim Vondruska
The Fed is expected to deliver two additional rate hikes of 25 basis
points in March and May. Traders on Friday raised their bets for
another increase in June. The U.S. central bank has raised its
policy rate by 450 basis points since last March from near zero to a
4.50%-4.75% range.
The personal consumption expenditures (PCE) price index shot up 0.6%
last month, the largest increase since June 2022, after gaining 0.2%
in December. In the 12 months through January, the PCE price index
accelerated 5.4% after rising 5.3% in December.
Excluding the volatile food and energy components, the PCE price
index increased 0.6%. That was the biggest gain since August 2022
and followed a 0.4% rise in December. The so-called core PCE price
index increased 4.7% on a year-on-year basis in January after
advancing 4.6% in December.
The Fed tracks the PCE price indexes for monetary policy. According
economists' calculations, core services prices excluding housing,
which are being closely watched by policymakers, increased 0.6%
after climbing 0.4% in December.
The rise in inflation reflects upgrades to consumer and producer
prices in annual revisions published this month. Businesses also
push through price increases at the beginning of the year. The
latest high readings left economists to expect that the road to
disinflation would be slow and bumpy, with a survey from the
University of Michigan on Friday showing consumers' near-term
inflation expectations increased in February.
But some believe the year-on-year PCE price data will be revised
lower when the Commerce Department's Bureau of Economic Analysis
(BEA) publishes its annual revisions to the series later this year.
The year-on-year CPI and PPI data were not impacted by the annual
revision.
"But so far the PCE price data are only getting the upward revision
from the annual revisions to the underlying source data from recent
months without getting the offsetting downward revisions to earlier
months," said Daniel Silver, an economist at JPMorgan in New York.
"This means that year-ago rates for the PCE price data in recent
months are 'too high' right now and likely will be revised down in
the BEA's own annual revision coming in the fall."
Personal income increased a solid 0.6%, the bulk of it coming from
strong wage growth. Income at the disposal of households after
adjusting for inflation surged 1.4%, the largest increase since
March 2021. Disposable income was also boosted by a 7.9% drop in tax
payments.
Consumers increased savings even as they stepped up spending. The
saving rate rose to 4.7%, the highest in a year, from 4.5% in
December.
"Households are drawing down excess savings at a slower rate than
before, likely due to recession concerns," said Sal Guatieri, a
senior economist at BMO Capital Markets in Toronto.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea
Ricci)
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