The U.S. consumer again asserted dominance over the economy increasing spending in January by the most in eight months, ignoring market turmoil here and abroad and giving the Federal Reserve’s rate hike campaign a shot in the arm.
Personal spending surged 0.5 percent following December’s revised 0.1 percent gain, initially reported as flat, according to the Commerce Department. Economists in the Bloomberg survey had predicted at 0.3 percent increase.
Personal spending rose an average of 0.3 percent monthly in 2015. The annual increase in consumption jumped to 4.2 percent last month from 3.2 percent in December for the largest yearly gain since 4.4 percent in November 2014.
Personal income keep pace with purchases adding 0.5 percent in January, better than December’s 0.3 percent gain and the 0.4 percent forecast. On the year incomes rose 4.3 percent, up from 4.0 percent in December but below the 4.4 percent average for 2015.
The Commerce Department also reported on Friday that gross domestic product expanded at a 1 percent annualized rate in the fourth quarter, faster than the previously reported 0.7 percent. Additions to business inventories accounted for the difference and these will have be carried over into the first quarter of 2015, potentially subtracting from GDP in the first three months.
A steady job market, rising wages, average hourly earnings rose the most in a year in January, and cheap gasoline, the nationwide price of gasoline has been below $2 a gallon for all of this year, have encouraged consumers to boost the spending which accounts for about 70 percent of GDP.
Real personal spending, that is corrected for price changes, rose 0.4 percent in January, in advance of the 0.3 percent forecast and the revised 0.2 percent gain in December. Annual real spending rose 2.9 percent in January from 2.5 percent the previous month and the best gain since last September. For all of 2015 real spending rose 3.1 percent.
Complementing last week’s consumer price index report that showed annual core inflation at 2.2 percent in January, the highest in three and a half years, today’s core personal consumption expenditure price index (PCE), the Federal Reserves’ preferred inflation measure, rose 0.3 percent in January and 1.7 percent on the year. It was the highest for this crucial gauge in almost two years.
When the Fed decided to increase the Fed Funds rate in December, the 0.25 percent hike was the first in almost a decade. At that meeting the governors projected four additional quarter point hikes in 2015, the first one coming at next month’s FOMC.
But since that meeting equities have tumbled worldwide and oil and other commodities have fallen to multi-year lows causing markets to question where the Fed could, in such circumstance, complete its rate program. By last week the odds of a March rate hike had dropped below 10 percent and the chance of a single 0.25 point increase by the end of the year was hovering around 50 percent.
Assumptions may have changed again.
With inflation now rising toward the Fed’s 2 percent target, backed by relatively robust consumption and incomes advances, next week’s February non-farm payrolls should go a long way to determining the next Fed policy move. January’s 151,000 new jobs was a dissapointment, well below the 240,000 average for the prior two years.
The Fed has long anticipated inflation moving to its target and now that this may finally be occurring, policy makers must weigh domestic inflation concerns against the turmoil in global markets and slowing economies almost everywhere else in the world.
Today's numbers are probably not enough to convince the Fed to keep its original schedule and add another 0.25 percent at the March 16 meeting. But if the current trends sustain, the anticipation will descend onto April and June.
Chief Market Strategist
WorldWideMarkets Online Trading