US Consumer Spending Rises the Most in Three Months

Consumer spending grew 0.5% in December 2016, higher than 0.2% in November 2016

Advance estimates released by the Bureau of Economic Analysis (BEA) on Friday, January 27th, 2017 showed that US consumer purchases climbed the most in three months in December 2016, despite a lower-than-projected 0.3% rise in incomes. For the full year FY16, incomes rose 3.5%, the smallest advance since 2013. The 0.5% advance in consumption, which accounts for about 70% of US economic activity, comes after a 0.2% advance in November 2016. Adjusting the figures for inflation, consumer spending rose 0.3% in December 2016, also the most in three months. The growth was led by a jump in outlays for durable goods, including motor vehicles. During December 2016, sales of cars and light trucks jumped to 18.3 million annualized rate, pushing the year’s total purchases to a record 17.55 million.

Overall, the US economy clocked a seasonally adjusted annual growth rate of 1.9% in Q4 FY16 versus forecasts for a 2.2% growth rate by the BEA. In Q3 FY16, real GDP grew a modest 3.5%, up from 1.4% in Q2 FY16, marking the highest growth rate in two years. US economic growth slowed more than expected in Q4 FY16 as a plunge in soybeans shipments weighed on exports. However, steady consumer spending and rising business investment suggests that the economy would continue to expand this year.

Q4 FY16 consumer spending

During Q4 FY16, consumer spending grew at a slower 2.5% rate after rising at a 3% pace in Q3 FY16. With domestic demand increasing steadily, businesses accumulated inventories at a robust rate of $48.7 billion in Q4 FY16, up from $7.1 billion in Q3 FY16. Inventories added 1.0 percentage point to GDP growth, almost double the contribution in Q3 FY16.

Apart from automobiles, business investment also shifted into higher gear, with spending on equipment rising 3.1% after four straight quarterly declines. Energy companies had earlier scaled back spending on new wells and equipment as oil prices plunged starting in 2014, but investment has started to rebound as prices have stabilized in recent months. Spending on mining exploration, wells, and shafts grew by 24.3% after declining 30% in Q3 FY16. Baker Hughes data released on January 27th, 2017 shows that US energy companies added 29 oil rigs in the week to January 20th, 2017, bringing the total count to 551, the highest since November 2015.

Another bright spot was the housing sector. Residential investment grew at a 10.2% annual rate in Q4 FY16 after two straight quarters of decline. However, in 2016, real household outlays climbed 2.7%, the least in three years. Investment in non-residential structures fell 5% in Q4 FY16 after rising 12% in the prior period. The gains in both consumer and business spending resulted in a measure of private domestic demand rising at a brisk 2.8%, up from the 2.4% pace notched in Q3 FY16. Government spending picked up as a rise in state and local government investment offset a decline in federal government expenditures.

Consumer sentiment rises to 13-year high

Consumer confidence rose in January 2017 to a 13-year high, reflecting ongoing optimism about post-election fiscal policies and their impact on economic growth, as reported by Bloomberg on January 27th, 2017. The University of Michigan said on January 27th, 2017, that its final index of consumer sentiment increased to 98.5 from 98.2 in December 2016.

While President Donald Trump’s promises to grow the economy, cut taxes and create more job opportunities have propelled sentiment, attitudes will be ultimately defined by proof of economic improvement. The report showed 44% of respondents, the most since 2004, said they anticipate the economy improving in 2017, while 33% expected the unemployment rate to keep falling.

The gauge of expectations six months from now climbed to 90.3 from 89.5 in December 2016 and up from a preliminary reading of 88.9 in January 2017. Rising incomes and higher stock and home values helped shore up Americans’ views of their finances, the report said. Roughly 41%, the most since mid-2005, said they had a favorable outlook for their finances. The current conditions index, which measures Americans’ perceptions of their personal finances, eased to 111.3 from 111.9 in December 2016. Respondents also expected the inflation rate in 2017 would be 2.6%, the highest since July 2016. That compares with 2.2% in the December 2016 survey.

Inflation inching toward Fed goal

The BEA report also showed inflation is gradually moving toward the Federal Reserve’s goal. The price gauge based on the personal consumption expenditures index increased 0.2% from the prior month and was up 1.6% from a year earlier. The core price measure, which excludes food and fuel, rose 0.1% from the prior month and was 1.7% higher than in December 2015. Inflation has not reached the Fed’s 2% goal since 2012.

Although Trump has not offered all detail regarding his economic policy, his promises have driven consumer and business confidence, with the US stock market surging to record highs. A stronger economy would also mean further interest rate increases from the Federal Reserve. The Federal Open Market Committee (FOMC), which met in Washington on December 13th-14th, 2016, increased its benchmark rate by a quarter percentage point to a range of 0.50% to 0.75% for the first time in 2016.

The Fed has also indicated that it expects to hike rates three more times in 2017, two or three in 2018, and three in 2019, as inflation expectations have increased considerably along with the strengthening of labor market conditions. The odds of the Fed hiking rates are virtually nil, according to futures markets, which are pricing in just a 4% chance of a quarter-point hike when the Fed convenes for a meeting on January 31st and February 1st, 2016, in Washington. The Fed will meet again on March 14th-15th, 2016 to assess the economic scenario post the rate hike.

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