US consumer spending and factory data point to weak GDP growth in the first quarter

WASHINGTON (Reuters) – US personal income declined for the first time in more than three years in January, and consumer spending has fallen the most since December 2009, putting the economy on a low growth trajectory at the start of the decade. first trimester.

The economic outlook was also overshadowed by other data released on Friday, showing that factory activity was at its lowest level in more than two years in February, with manufacturers reporting a slowdown in new orders and new hires. The reports extended the series of unreliable data on a declining economy at the end of 2018 and reinforced the credibility of the Federal Reserve's "patient" stance on raising interest rates this year.

The economy slows as the $ 1.5 trillion tax cut and increased government spending declines. A trade war between the United States and China, rising interest rates, slowing global growth and uncertainties surrounding Britain's exit from the European Union are clouding the outlook.

"A modest slowdown remains the most likely route for 2019," said Eric Winograd, a leading American economist at AllianceBernstein in New York. "We should not expect any action from the Fed at least for the second half of the year."

The Commerce Department said personal income fell by 0.1% in January, the first decline since November 2015, after jumping 1.0% in December. Revenues were weighed by lower dividends, farm owners' income and interest.

Revenues were boosted in December by an outstanding dividend paid by VMware Inc.'s information technology company, as well as payments by governments to farmers caught in the US-China trade war .

Wages rose slightly by 0.3% in January after rising 0.5% in December. Economists polled by Reuters had forecast revenue up 0.3% in January.

The Commerce Department did not publish the January portion of the report devoted to consumer spending, as the collection and processing of retail sales data was delayed by a partial 35-day government closure that ended on 25 January.

Consumer spending, which accounts for more than two-thirds of US economic activity, fell by 0.5% in December. This is the largest decrease since September 2009 and follows a 0.6% increase in November.

Households reduced their purchases of motor vehicles and recreational goods in December, resulting in a 1.9% drop in spending on goods. Expenditure on goods rose 1.0% in November. Spending on services edged up 0.1%, dampened by lower spending on electricity and gas. Spending on services rose 0.4% in November.

After adjusting for inflation, consumer spending fell 0.6% in December, also the largest decline since September 2009, following a 0.5% gain in November.

December data were included in the fourth quarter gross domestic product report released on Thursday, which showed that consumer spending had increased 2.8% annualized over the period, a slowdown from robust pace of 3.5% of the third quarter.

The economy grew 2.6% in the quarters from October to December, after a 3.4% pace in the third quarter.

The dollar has changed little in relation to a basket of currencies. Wall Street shares were trading higher, while US Treasury prices fell.

Strong economy

The sharp deceleration in consumer spending in December led to a weaker growth trajectory for consumption in the first quarter and reinforced analysts' expectations of a slowing economy in the first three months of the year.

"Unless there is an upward revision to December's dismal retail sales numbers, the weak end-of-quarter consumption pattern makes arithmetic very difficult for first-quarter consumption growth." said Michael Feroli, an economist at JPMorgan in New York.

Nevertheless, consumer spending is likely to remain supported by a strong accumulation of savings, which reached its highest level in six years: $ 1,200 billion in December, against $ 961.3 billion in November. The savings rate reached a record level of 7.6% in three years. In addition, consumer sentiment remains high.

With spending down, inflation remained under control in December. The price index of personal consumption expenditure, excluding unstable components of food and energy products, rose 0.2% after a similar gain in November.

This left the year-on-year increase of 1.9% in the so-called CPI base price index. The core PCE index is the measure of inflation favored by the Fed.

It reached the 2% inflation target of the US central bank in March for the first time since April 2012.

Inflation is expected to remain moderate despite a tight labor market, with supply-side constraints easing. A third report released on Friday said the Institute for Supply Management's (ISM) national plant activity index fell by 2.4 points to 54.2 last month, its lowest performance since November 2016.

A value greater than 50 in the ISM index indicates an expansion of the manufacturing sector, which accounts for about 12% of the US economy. Raw materials prices fell for a second consecutive month in February, after almost three years of increases.

Manufacturers offered mixed views on commercial conditions. Machine manufacturers said that orders remained firm, but metal products manufacturers expressed concern "about indicators showing a mild recession for the second half of the calendar year."

Manufacturers of plastic and rubber products said that "general market conditions began to slow down at the end of January and continued until February."

"This reinforces our decision to reduce our GDP forecast for the first quarter," said Jennifer Lee, Senior Economist at BMO Capital Markets in Toronto. "We need a turnaround in the coming months."