Daily Management Review

Consumer Expenditure And Orders For Core Capital Goods Show That The US Economy Going Strong


Consumer Expenditure And Orders For Core Capital Goods Show That The US Economy Going Strong
Consumer spending in the United States climbed more than predicted in January, providing a big boost to the economy at the start of the first quarter, but price pressures remained high, with annual inflation climbing to levels not seen in over four decades.
Other statistics released on Friday showed strong demand for equipment by firms last month, boosting growth forecasts even further. The Commerce Department's assessments revealed underlying economic resilience that might keep the recovery going while the Federal Reserve raises interest rates to combat inflation and protect the economy from the consequences from Russia's invasion of Ukraine.
The Federal Reserve is anticipated to raise interest rates for the first time next month. According to economists, there might be as many as seven rate hikes this year. Morgan Stanley raised its first-quarter GDP growth forecast from 3.8 per cent to 5.4 per cent annualised. In the fourth quarter, the economy increased at a rate of 7.0 per cent.
"The real economy appears to be in stronger health than we feared, suggesting that the Fed will push on with its planned rate hikes starting in March, although the Ukraine conflict makes a 50 basis points hike less likely," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
 Consumer expenditure, which accounts for almost two-thirds of all economic activity in the United States, increased by 2.1 per cent in January after declining by 0.8  per cent in December. Purchases of motor cars, nondurable products such as clothes and leisure goods, as well as expenditures on heating in many regions of the country, drove spending.
However, a rise of Covid-19 infections, spurred by the Omicron variety, slashed expenditure at restaurants, pubs, and hotels and motels. Air travel spending has also decreased.
Consumer spending was expected to climb 1.5 per cent, according to economists surveyed by Reuters. Despite the fact that consumer sentiment, as assessed by the University of Michigan, has fallen to a more than decade low, expenditure has increased.
Massive savings and high pay growth are supporting consumer spending as the labour market tightens. Following the termination of the Child Tax Credit payments, this is offsetting a loss in government money to households.
Last month, a 0.5 per cent gain in earnings was countered by a fall in government social payments, leaving personal income flat. Economists dismissed the dip in the savings rate, which fell to 6.4 per cent in December from 8.2 pe rcent in December, the lowest since December 2013.
"Households, in aggregate, still have about $2 trillion saved up from earlier in the pandemic, and some of the January drop in saving came from a reduction in Child Tax Credit payments," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "Households will adjust to the reduced tax credit and the saving rate will return to above 7 per cent."
After climbing 0.5 per cent in December, the personal consumption expenditures (PCE) price index jumped 0.6 per cent in January.
The PCE price index increased by 6.1 per cent in January. This was the highest gain since February 1982, and it came after a 5.8% year-over-year increase in December. The PCE price index rose 0.5 per  cent after rising 0.5 per cent in December, excluding the volatile food and energy components.
In January, the so-called core PCE price index increased by 5.2 per cent year over year, the highest increase since April 1983. In the 12 months leading up to December, the core PCE price index grew by 4.9 per cent.
Household purchasing power is being eroded as inflation rises over the Fed's 2 per cent objective. After accounting for inflation, family income decreased by 0.5 per cent.
Because of the Russia-Ukraine crisis, price pressures may continue to rise. Brent oil prices jumped above $100 per barrel for the first time since 2014 on Thursday, before falling to below $97 per barrel on Friday.
Consumer spending increased 1.5 per cent in January after falling 1.3 per cent in December when adjusted for inflation.
Because of the impact from inventories, some economists anticipate GDP will be below 2.0 per cent this quarter.