02/28/2020

U.S. consumer spending rose less than expected in January, a loss of momentum that could be exacerbated by the rapidly spreading coronavirus, which has triggered a sharp stock market sell-off and revived fears of a recession.

Other data on Friday showed the goods trade deficit contracted sharply in January, with both imports and exports declining. While the narrowing goods trade deficit could be a boost to the calculation of gross domestic product, a lot depends on how the coronavirus unfolds in the United States.

The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% last month as unseasonably mild weather reduced demand for heating and undercut sales at clothing stores.

Data for December was revised higher to show consumer spending rising 0.4%, instead of the previously reported 0.3% increase. Economists polled by Reuters had forecast consumer spending gaining 0.3% in January.

Wall Street’s main indexes slipped into correction territory on Thursday, with the yield on the benchmark 10-year Treasury note plumbing record lows. Financial markets view the coronavirus epidemic as the catalyst that could interrupt the longest economic expansion on record, now in its 11t year.

The coronavirus has killed more than 2,000 people and infected at least 80,000 people, most of them in China.

Money markets have increased their bets on the prospect of more Federal Reserve interest rate cuts. The U.S. central bank cut rates three times last year. The coronavirus outbreak could challenge the Fed’s desire to keep monetary policy on hold at least through 2020.

U.S. stock index futures were trading lower on Friday. The dollar was little changed against a basket of currencies. U.S. Treasury prices were higher.

TAME INFLATION

With consumer spending tepid, inflation remained benign. Consumer prices as measured by the personal consumption expenditures (PCE) price index edged up 0.1% in January. The PCE price index was held back by a 0.7% drop in the cost of energy goods and services, offsetting a 0.3% gain in food prices.

The PCE price index increased 0.3% in December. In the 12 months through January, the PCE price index accelerated 1.7%. That was the biggest gain since December 2018 and reflected the drop of 2019’s low readings from the calculation. The PCE price index advanced 1.5% year-on-year in December.

Excluding the volatile food and energy components, the PCE price index ticked up 0.1% in January after rising 0.2% in December. That lifted the annual increase in the so-called core PCE price index to 1.6% in January from 1.5% in December.

The core PCE index is the Fed’s preferred inflation measure. It missed the central bank’s 2% target every month in 2019.

When adjusted for inflation, consumer spending nudged up 0.1% in January after rising by the same margin in the prior month. That suggests consumer spending got off to a slow start in the first quarter after cooling considerably in the final three months of 2019.

The government reported on Thursday that consumer spending increased at a 1.7% annualized rate in the fourth quarter, stepping back from the July-September quarter’s brisk 3.2% pace. The economy grew at a 2.1% rate in the fourth quarter, matching the third quarter’s pace.

The coronavirus epidemic prompted Goldman Sachs early this week to cut its first-quarter gross domestic product growth estimate by two-tenths of a percentage point to a 1.2% rate. Growth estimates for the January-March quarter were already on the low side because of Boeing’s suspension of production of its troubled 737 MAX plane starting last month.

In second report on Friday, the Commerce Department said the goods trade deficit contracted 4.6% to $65.5 billion in January. Goods imports tumbled 2.2% last month and exports dropped 1.0%.

The department also reported retail inventories were unchanged in January after edging down 0.1% in the prior month.

Retail inventories, excluding motor vehicles and parts, the component that goes into the calculation of GDP, increased 0.3% last month after gaining 0.1% in December. Inventories at wholesalers fell 0.2% in January. That followed a 0.3% decline in December.

Despite last month’s tepid gain in spending, consumer fundamentals remain healthy. Personal income jumped 0.6% in January, the most since February 2019, after gaining 0.1% in December. Income was boosted by the annual cost of living adjustment for social security recipients and other government welfare programs.

Wages rose 0.5% in January after gaining 0.1% in the prior month. With income growth outpacing consumer spending, savings raced to $1.33 trillion last month, the highest since March 2019, from $1.26 trillion in December.

Reuters (Reporting by Lucia Mutikani; Editing by Andrea Ricci)