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WASHINGTON, Dec 23 (Reuters) – U.S. consumer spending barely rose in November as annual inflation rose at its slowest pace in 13 months, but demand probably isn’t cooling enough quickly to discourage the Federal Reserve from raising interest rates next year. . .
The slowdown in economic activity heading into 2023 amid rising borrowing costs was also flagged by other Commerce Department data on Friday, showing a modest increase in orders for manufactured capital goods. locally last month. The US central bank is trying to dampen demand for everything from housing to labor as it battles to bring inflation back to its 2% target.
“The economy is moving in the right direction from the Fed’s perspective, but not fast enough,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.
Consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1% after jumping 0.9% in October. Economists polled by Reuters had forecast consumer spending to rise 0.2%.
Part of the moderation in spending reflects a shift in demand from goods to services. Slower price increases for some goods also lowered the dollar amount of consumer spending.
Spending on durable manufactured goods fell 2.3%, mainly due to lower purchases of motor vehicles. There were additional restraints on spending on furniture and other equipment as well as recreational goods and vehicles.
Spending on services rose 0.7%, driven by housing and utilities as well as financial services and insurance. They offset declines in air transport services.
The personal consumption expenditure (PCE) price index rose 0.1% last month after rising 0.4% in October. Food prices rose 0.3%, the smallest increase since December 2021. Prices for energy goods and services fell 1.5%. Prices for services, which can be sticky, rose 0.4%, reflecting housing inflation.
In the 12 months to November, the PCE price index rose 5.5%. It was the smallest annual gain since October 2021, and followed a 6.1% gain in October.
Excluding the volatile components of food and energy, the PCE price index gained 0.2% after rising 0.3% in October. The so-called core PCE price index climbed 4.7% on an annual basis in November, also the smallest rise since October 2021, after rising 5.0% in October.
The Fed tracks PCE price indices for monetary policy. President Joe Biden welcomed the cooling in inflation, which has been evident in other price measures, but warned of shocks ahead.
“There will be more ups and downs in the year ahead, but we are making progress in building an economy from the bottom up and in the middle, and I am optimistic for the year ahead,” Biden said. in a press release.
Consumer prices rose less than expected for a second consecutive month in November. Consumer one-year inflation expectations also moderated in December, reinforcing the view that price pressures had peaked several months ago.
Wall Street stocks fell. The dollar slipped against a basket of currencies. US Treasury yields rose.
SOLID WAGE GAINS
“Inflation continues to slow, which is good news for the Fed’s most important objective, but unfortunately for the market, this is happening at the same time as consumers are cutting back on spending,” said Chris Zaccarelli, director of investments at the Independent Advisor Alliance in Charlotte, North Carolina.
Last week, the Fed raised its key rate by 50 basis points to a range of 4.25% to 4.50%, the highest since late 2007. Fed officials expect the rate increases between 5.00% and 5.25% next year, a level that could be maintained .. for a while.
Adjusted for inflation, consumer spending was flat last month after rising 0.5% in October.
Nevertheless, consumer spending is on track to provide further impetus to economic growth this quarter due to October’s solid increase and lower inflation. The economy grew at an annualized rate of 3.2% last quarter after contracting in the first half. Growth estimates for the fourth quarter reach a pace of 3.7%.
Consumer spending is supported by strong wage gains, thanks to a tight labor market, as well as savings accumulated during the first year of the COVID-19 pandemic.
Personal income rose 0.4% last month as wages rose 0.5%. But higher borrowing costs, rapidly depleting savings and dwindling household wealth could stifle consumer spending and tip the economy into recession next year.
Although the savings rate climbed to 2.4% from 2.2% in October, it remains near record lows.
Economists are cautiously optimistic that the Fed would probably not need to raise its key rate much higher than currently expected, resulting in only a mild recession. It all depends on the job market.
“If inflation continues to moderate, albeit slowly, and the Fed doesn’t push its key rates well above 5%, the economy should come out of this with just a slight slowdown,” Sal said. Guatieri, senior economist at BMO Capital Markets in Toronto.
A second report from the Commerce Department showed that orders for non-military capital goods excluding aircraft, a closely watched indicator of business spending plans, rose 0.2% in November. These so-called basic capital goods orders rose 0.3% in October. Data is not adjusted for inflation.
Slowing price increases, a strong dollar and the shift in spending from goods to services likely contributed to the moderation in orders. Shipments of basic capital goods fell 0.1% after rising 1.4% in October.
Shipments of basic capital goods are used to calculate capital expenditures in the GDP measure. Capital spending remains on track to support the economy again this quarter.
A third Commerce Department report showed new home sales rose for a second consecutive month in November, likely as Americans took advantage of lower mortgage rates and incentives from desperate builders. The overall housing market, however, remains depressed.
“We expect limited upside in new home sales in the coming months, but incentives offered by homebuilders and the recent drop in mortgage rates could keep sales bottoming,” said US economist Nancy Vanden Houten. chief at Oxford Economics in New York.
Reporting by Lucia Mutikani; Editing by Dan Burns, Peter Graff and Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.
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