It might be that all those fears about the US economy going into recession have been overblown — though there may be more tea leaves to read when this quarter is over.
Americans saw their incomes increase in January by the largest amount since June and not surprisingly, boosted their spending at the fastest pace in eight months.
Consumer spending rose 0.5% in January, up from December’s 0.1% increase, the US Commerce Department reported Friday. Incomes also grew 0.5% in January, up from 0.3% in December.
With consumer spending making up about two-thirds of economic activity, Friday’s report will likely raise expectations that consumers will fuel overall economic growth this quarter and ease fears of a looming recession.
Economists polled by Reuters had forecast consumer spending rising 0.3% last month after a previously unchanged reading in December.
The increased spending also lifted a key inflation indicator. For the 12 months through January, the personal consumption expenditures (PCE) price index rose 1.3%, the largest increase since October 2014. This was double the December’s 0.7% increase. Excluding food and energy, prices rose 0.3%, the largest increase since January 2012. This followed December’s 0.1% gain
The so-called core PCE price index rose 1.7% for the 12 months ended January, the largest rise since July 2014. The core PCE, which is the US Federal Reserve Bank’s preferred inflation measure, was up 1.5% in December.
In December, the Fed lifted its key interest rate by a quarter-point, the first increase in nearly a decade. The Fed has said it plans to raise rates further this year. While the financial markets have ruled out a US interest-rate hike in March, the combination of solid consumer spending, a strengthening labor market and steadily rising inflation suggests further monetary policy tightening cannot be ruled out this year.
The Commerce Department also reported Friday that the overall economy grew at an annual rate of 1% in the fourth-quarter of 2015.
This was down from a 2.0% growth rate in the third quarter. For all of 2015, GDP grew 2.4%. The Commerce Department blamed the slowing rate on businesses being less aggressive in their efforts to reduce unwanted inventory. Businesses accumulated $81.7 billion worth of inventory in the fourth quarter rather than the $68.6 billion reported last month. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction.
The bigger inventory build is bad news for first-quarter GDP growth as it means businesses will have little incentive to place new orders, which will continue to hold down production.
“The weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected,” Paul Ashworth, chief US economist at Capital Economics in Toronto told Reuters. “Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5% annualized or higher, which should dampen any concerns about an imminent recession.”
Economists believe stronger spending will boost gross domestic product growth to around 2% in the current January-March quarter