U.S. consumer, factory data suggest economy losing momentum

WASHINGTON (Reuters - U.S. consumer spending rose steadily in December, but tepid income gains pointed to moderate consumption growth this year, which together with slumping business investment likely set the economy on a slower growth path this year.

While the report on Friday from the Commerce Department also showed inflation picking up last month because of higher prices for energy products, price pressures remained muted. The Federal Reserve left interest rates unchanged on Wednesday and could keep monetary policy on hold at least through 2020.

Economic growth is already expected to slow considerably in the first quarter, in part because of Boeing’s (BA.N) suspension this month of production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes.

“The consumer says don’t count on me in 2020, and their support will be critical for growth this year,” said Chris Rupkey, chief economist at MUFG in New York. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.3% last month as households spent more on prescription medication and healthcare services. That followed an unrevised 0.4% rise in November.

December’s increase in consumer spending was in line with economists’ expectations. When adjusted for inflation, consumer spending nudged up 0.1% in December after rising 0.3% in the prior month. That likely puts consumer spending on a slower growth trajectory heading into the first quarter.

For all of 2019, consumer spending increased 4.0%, the smallest gain in three years, after advancing 5.2% in 2018.

The data was included in the gross domestic product report for the fourth quarter, which was published on Thursday. The government reported that growth in consumer spending slowed to a 1.8% annualized rate last quarter after expanding at a brisk 3.2% pace in the July-September period.

The economy grew at a 2.1% rate in the final three months of 2019, matching the third quarter’s pace.

Despite the anticipated slowdown in growth this year, a recession is not expected as the economy draws support from the Fed’s three rate cuts last year. Fed Chairman Jerome Powell told reporters on Wednesday that he expected “moderate economic growth to continue” but also acknowledged some risks, including the recent coronavirus outbreak in China.

Business investment contracted in the fourth quarter for the third straight quarter, the longest such stretch since 2009. It has been hurt by the Trump administration’s 18-month trade war with China, which has depressed business confidence.

Washington and Beijing signed a Phase 1 trade deal this month, but U.S. tariffs remained in effect on $360 billion of Chinese imports, about two-thirds of the total. There are no signs of a turnaround in business investment.

A separate report on Friday showed a measure of manufacturing activity in the Midwest dropped to a four-year low in January, with factories reporting declines in new orders and order backlogs.

The dollar .DXY weakened against a basket of currencies, while prices of U.S. Treasuries rose. Stocks on Wall Street fell on worries over the impact of the coronavirus epidemic on global economic growth.

CONSUMER SENTIMENT SEEN EBBING

The World Health Organization declared the epidemic a global emergency on Thursday. The fast-spreading virus has killed more than 200 people in China and infected thousands globally.

Economists expect the epidemic to weigh on manufacturing by disrupting supply chains. The virus, together with the downturn in manufacturing, slowing job growth and falling share prices, is expected to restrain consumer sentiment this year. Consumer sentiment ticked up in January, other data showed on Friday.

“Most fundamentals are weakening or expected to do so, so confidence may be near its peak,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Confidence is likely to trend lower in 2020.”

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.3% last month, the biggest gain since April. The PCE price index was boosted a 1.5% surge in energy goods and services costs. Food prices were unchanged.

The PCE price index edged up 0.1% in November. In the 12 months through December, the PCE price index increased 1.6%, the biggest advance in a year, after climbing 1.4% in the 12 months through November.

Excluding the volatile food and energy components, the PCE price index gained 0.2% last month after edging up 0.1% in each of the four prior four months. That lifted the annual increase in the so-called core PCE price index to 1.6% in December from 1.5% in November.

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

Benign inflation was underscored by a fourth report from the Labor Department showing the Employment Cost Index, the broadest measure of labor costs, rose 0.7% last quarter after a similar gain in the third quarter.

That lowered the year-on-year rate of gain in the ECI to 2.7%. Labor costs rose 2.8% on a year-on-year basis in the third quarter. The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation.

Labor costs peaked in the final quarter of 2018 as a tightening labor market pushed up wage growth. The pace of increases has since slowed in tandem with wages.

Personal income gained 0.2% last month after an increase of 0.4% in November. There was a $36.2 billion decrease in farm proprietors’ income, reflecting a drop in subsidy payments to farmers caught in the 18-month U.S.-China trade war.

Income rose 4.5% in 2019 after surging 5.6% in 2018. Wages gained 0.3% in December after rising 0.4% in November.

“Income is just not growing fast enough to support even the modest-to-moderate spending increases,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Savings fell to $1.28 trillion last month from $1.30 trillion in November. In 2019, savings increased to a record $1.31 trillion from $1.21 trillion in 2018.