Consumers Increasingly Prop Up a U.S. Economy That's Set to Slow Down
(Bloomberg) -- The onus is falling more squarely on consumers to drive U.S. economic growth as business investment shows further signs of slowing.
Consumption -- which accounts for about 70 percent of the economy -- rose more than forecast in November, a Commerce Department report showed Friday, while consumer sentiment improved in December. By contrast, business equipment orders unexpectedly fell in November and a regional gauge of manufacturing cooled.
The economy is still expanding at a decent rate -- albeit probably slower than the prior quarter -- amid solid holiday shopping, a tight labor market that’s underpinning wages, and contained inflation. Even so, corporate America faces headwinds including the trade war with China, rising borrowing costs and a tax-cut boost that’s set to wane.
That underscores why stocks and Treasury yields have plunged this month and Federal Reserve officials this week lowered their path of expected interest-rate hikes in 2019.
“There’s a dichotomy between financial-market sentiment, which has weakened dramatically, and actual fundamental data, which is fine,” said Michael Gapen, chief U.S. economist at Barclays Plc. While consumers are spending, “there’s no further room for stimulus, so the consensus is that growth will slow in the U.S.,” he said, adding “we had a boost in business spending and we expect it to fade.”
What Our Economists Say...The latest data on personal spending shows that consumers are not cutting costs, which will ensure the sector will remain the backbone of economic growth going into 2019. Fed policy makers will watch inflation developments very closely as the core gauge hovers around their projections for next year.
-- Yelena Shulyatyeva and Carl Riccadonna, Bloomberg Economics
Read the full note on consumer spending here and the note on durable goods here.
Here are the highlights of Friday’s releases, which were bunched together ahead of the Christmas holiday:
- Consumer purchases rose 0.4 percent in November, more than forecast, after an upwardly revised 0.8 percent advance. Incomes gained 0.2 percent, slightly less than forecast and matching the slowest advance this year, while the saving rate fell to a five-year low of 6 percent.
- The Fed’s preferred headline inflation gauge -- tied to consumption -- rose 1.8 percent last month from a year earlier, Commerce figures showed. Excluding food and energy, so-called core prices were up 1.9 percent from November 2017, matching projections. While the central bank targets 2 percent inflation including all items, it looks to the core gauge as a better indicator of underlying price trends.
- A measure of capital-goods orders that excludes aircraft and military placements -- a proxy for business investment -- dropped 0.6 percent in November, the third decline in four months, after an upwardly revised 0.5 percent increase the prior month, Commerce figures showed. Bookings for all durable goods, a broader measure of items meant to last at least three years, rebounded by less than expected.
- The University of Michigan’s final December sentiment index rose from the prior month to 98.3, topping all forecasts in Bloomberg’s survey. The current conditions gauge rose to a six-month high but the expectations measure slipped to the lowest since June.
- The Kansas City Fed’s index of manufacturing in the district fell to two-year low of 3 in December. It’s the third regional Fed factory gauge this week to drop to the lowest in more than 18 months, following the Empire State survey and the Philadelphia Fed report.
- Third-quarter gross domestic product grew at a 3.4 percent annualized rate, revised from 3.5 percent but still the fastest two-quarter growth performance since 2014. That reflected downward adjustments to consumer spending and net exports, which was pegged at the biggest drag since 1984.
New York Fed President John Williams on Friday sought to reassure investors that the U.S. central bank will listen to financial-market signals in setting interest rates, emphasizing that the outlook for some more gradual hikes next year is guidance, not a commitment.
“This is not a commitment, or a promise, or in any way a sense that we know for sure that’s what we are going to do,” Williams said in a television interview on CNBC. “We are actually saying pretty clearly this is how we see it now based on our positive, pretty optimistic view of the economy, and we will change that as needed.”
©2018 Bloomberg L.P.