An economic slowdown was expected in 2019, and the data prove the prediction was correct. Now, consumer spending, which has fueled the record-long economic expansion, shows signs of softening, which could portend the need for the Federal Reserve to ease policy at some point.
Personal spending grew 0.3% in December after a 0.4% rise in November, the Commerce Department reported Friday. With business investment still sluggish, at best, a slowdown in consumer spending could reduce gross domestic product growth, which came in at 2.1% for the last quarter of 2019. And with part of the yield curve dipping in to negative territory at some points this week, recession fears could emerge.
The report showed inflation creeping up, but still short of the Fed’s 2% target. On a monthly basis personal consumption expenditures (PCE) climbed 0.3% in December, driven by rises in energy goods and services, while the core grew 0.2% in the month. Year-over-year PCE rose 1.6% in December, up from 1.4% in the year ending in November, while core PCE, which is the Fed’s favored measure of inflation, rose 1.6% on an annual basis in the month, up just 0.1-point from a month earlier.
“Consumer spending driven by job gains and increased wages buffeted the U.S. economy from global headwinds in 2019,” according to Scott Colbert, executive vice president and chief economist at Commerce Trust Co. “But consumers slowed their spending toward the end of the year as income growth moderated slightly. Specifically, disposable income registered a tepid 0.2% advance and spending rose 0.3%.”
When adjusted for inflation, he said, “real disposable income fell 0.1% on the month while real consumer spending was tepid at 0.1%.”
Although price pressures remain modest, with core inflation up 1.6% year-over-year “the global economy is likely to cool further as the effects of the coronavirus begin to impact first quarter economic activity,” Colbert said. “As such it’s quite probable this slowdown will lead to another eventual Fed rate cut especially to the extent inflation moderates even further since the Fed has signaled they remain committed to their 2% inflation target.”
But even with the consumer slowdown, Steven Friedman, senior global macroeconomist at MacKay Shields, said, “Given an accommodative monetary policy backdrop and signs of a recovery in global manufacturing, growth this year should come in close to 2%.”
And noting that the Fed’s framework review scheduled to be complete this year, “weak inflation affords room for additional accommodation even with growth around its long-run potential.”
Acknowledging the slowdown in spending, Dec Mullarkey, managing director for investment strategy at SLC Management, noted it was still higher than a year ago. “With inflation contained and consumer confidence still buoyant, the solid job market is going to keep America spending and the economy on track,” he said. “Robust employment will continue to be the key pillar to keeping the expansion going.”
“Consumer spending slowed fairly significantly in the fourth quarter and could suffer additional weakness in the first quarter as the effects of the coronavirus offset an improvement in consumer attitudes,” according to Grant Thornton Chief Economist Diane Swonk.
“The Fed is betting that year-over-year measures of inflation will rise in the months to come,” she said in a note. “A slowdown in inflation in early 2019 makes year-on-year comparisons easier to meet. We expect that a shortfall in inflation and wage growth, coupled with a need to offset weakness associated with the coronavirus, will force the Fed to cut rates at least once again in 2020.”
Consumer sentiment rose to 99.8 in the final January read from the University of Michigan. Earlier in the month, the index was reported at 99.1, compared with 98.9 in December.
In a separate report, the Labor Department said employment costs rose 0.7% in the fourth quarter.
Manufacturing
The Chicago Business Barometer fell to 42.9 in January, its lowest reading since December 2015, as all five major components of the index fell in the month. The December read was revised down to 48.2 from 48.9.
Economists expected a 48.5 read.
Meanwhile, the Milwaukee ISM Report on Manufacturing rose to 52.33 in January from 45.10 in December. This was the first time since May the index showed expansion.
