U.S. consumer spending strong; manufacturing struggling

FILE PHOTO: People tour The Shops during the grand opening of The Hudson Yards development, a residential, commercial, and retail space on Manhattan's West side in New York City, New York, U.S., March 15, 2019. REUTERS/Brendan McDermid

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage financial market fears that the economy was heading into recession.

The upbeat report from the Commerce Department on Thursday, however, will likely not change expectations that the Federal Reserve will cut interest rates again next month as news from the manufacturing sector remains dour, underscoring the darkening outlook for the economy against the backdrop of trade tensions and slowing growth overseas.

A key part of the U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, triggering a stock market sell-off. An inverted Treasury yield curve is historically a reliable predictor of looming recessions.

Financial markets have fully priced in a 25-basis-point rate cut at the U.S. central bank’s Sept. 17-18 policy meeting. The Fed lowered its short-term interest rate by a quarter of a percentage point last month, citing the acrimonious U.S.-China trade war and slowing global economies.

But the data could push markets to dial back expectations of a 50-basis-point rate cut next month.

“So yes, consumers are lifting economic growth and easing pressure on the Federal Reserve to cut more aggressively, but the trade war itself, and the rhetoric that accompanies it will push for more rate cuts,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0% last month after advancing by an unrevised 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

U.S. stock index futures extended gains after the release of the data. U.S. Treasury yields rose while the dollar <.DXY> was slightly weaker against a basket of currencies.

STRONG LABOR MARKET

July’s gain in core retail sales suggested strong consumer spending early in the third quarter, though the pace will likely slow from the April-June quarter’s robust 4.3% annualized rate. Consumer spending, which accounts for more than two-thirds of the economy, is being underpinned by the lowest unemployment rate in nearly half a century.

While a separate report from the Labor Department on Thursday showed an increase in the number of Americans filing applications for unemployment benefits last week, the trend in claims continued to point to a strong labor market.

Solid consumer spending is blunting some of the hit on the economy from the downturn in manufacturing, which is underscored by weak business investment. There are, however, red flags for the labor market coming from manufacturing.

The sector’s struggles were highlighted by a third report from the Fed on Thursday showing factory production dropped 0.4% in July. Output at factories has declined more than 1.5% since December 2018. Manufacturing, which makes up about 12% of the economy, is also being weighed down by an inventory overhang, especially in the automotive sector.

Manufacturing productivity tumbled at its fastest pace in nearly two years in the second quarter, with factories cutting hours for workers, another report from the Labor Department showed.

Manufacturing’s troubles appear to have persisted into the third quarter. Though a report from the Philadelphia Fed on Thursday showed factory activity in the mid-Atlantic region slowed less than expected in August amid an increase in new orders, manufacturers reported hiring fewer workers.

A measure of factory employment dropped to its lowest level since November 2016. The weakness in factory employment in the region that covers eastern Pennsylvania, southern New Jersey and Delaware was mirrored by another survey from the New York Fed. Activity in New York state was little changed this month, with employment measures deteriorating further.

“The health of factories is still an important driver of growth and the soft patch for production remains a factor that is keeping economic growth in the slow lane,” said Chris Rupkey, chief economist at MUFG in New York.

The economy grew at a 2.1% rate in the second quarter, decelerating from the first quarter’s 3.1% pace. Growth estimates for the third quarter are below a 2.0% rate.

In July, auto sales fell 0.6% after rising 0.3% in June. Receipts at service stations rebounded 1.8%, reflecting higher gasoline prices. Sales at building material stores gained 0.2%.

Receipts at clothing stores increased 0.8%. Online and mail-order retail sales jumped 2.8%, the most in six months, after rising 1.9% in June. They were likely boosted by Amazon.com Inc’s <AMZN.O> Prime Day.

Receipts at furniture stores rose 0.3%. Sales at restaurants and bars accelerated 1.1%. But spending at hobby, musical instrument and book stores dropped 1.1% last month.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

U.S. economy slows in second quarter; consumer spending accelerates

FILE PHOTO: Shoppers carry bags of purchased merchandise at the King of Prussia Mall in King of Prussia, Pennsylvania, U.S., December 8, 2018. REUTERS/Mark Makela/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. economic growth slowed less than expected in the second quarter as a surge in consumer spending blunted some of the drag from declining exports and a smaller inventory build, which could further allay concerns about the economy’s health.

The fairly upbeat report from the Commerce Department on Friday will probably not deter the Federal Reserve from cutting interest rates next Wednesday for the first time in a decade, given rising risks to the economy’s outlook, especially from a trade war between the United States and China.

Despite the better-than-expected GDP reading, business investment contracted for the first time in more than three years and housing contracted for a sixth straight quarter. Fed Chairman Jerome Powell early this month flagged business investment and housing as areas of weakness in the economy.

But robust consumer spending, together with a strong labor market, further diminish expectations of a 50 basis point rate cut and could raise doubts about further monetary policy easing this year.

Gross domestic product increased at a 2.1% annualized rate in the second quarter, the government said. The economy grew at an unrevised 3.1% pace in the January-March quarter. Economists polled by Reuters had forecast GDP increasing at a 1.8% rate in the second quarter.

The economy has expanded for 10 years, the longest run in history. Activity is slowing largely as the stimulus from the White House’s $1.5 trillion tax cut package fades. The tax cuts together with more government spending and deregulation were part of measures adopted by the Trump administration to boost annual economic growth to 3.0% on a sustained basis.

The economy grew 2.9% in 2018 and growth this year is expected to be around 2.5%. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at between 1.7% and 2.0%.

The GDP report showed a pickup in inflation last quarter, though the trend remained benign. A gauge of inflation tracked by the Fed increased at a 1.8% rate last quarter, just below the U.S. central bank’s 2% target. Inflation increased 1.5% compared the second quarter of 2018.

The government also published revisions to GDP data from 2014 through 2018. The updated data showed growth in the second and third quarters of last year was not as robust as previously estimated, and the economy grew much more slowly in the fourth quarter than had been reported in March. Revised price data showed moderate inflation last year.

The dollar extended gains versus a basket of currencies after the data, while prices for U.S. Treasury fell. U.S. stock index futures pared gains.

STRONG CONSUMER SPENDING

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged at a 4.3% rate in the second quarter, the fastest since the fourth quarter of 2017. Consumer spending grew at a 1.1% rate in the first quarter.

Some of the slowdown in consumer spending early in the year was blamed on a 35-day partial shutdown of the government.

Spending is being supported by the lowest unemployment rate in nearly 50 years, which is lifting wages.

The jump in consumer spending helped to offset some of the weakness from exports, which fell at a 5.2% rate last quarter, in a reversal of the strong growth experienced in the first quarter.

The plunge in exports caused a deterioration of the trade deficit. As result, trade subtracted 0.65 percentage point from GDP growth last quarter after contributing 0.73 percentage point in the January-March period.

The acceleration in consumer spending also helped businesses to whittle down an inventory overhang, leading to a smaller inventory build.

Inventory investment increased at a $71.7 billion rate, slowing from the first quarter’s $116.0 billion pace of increase. While inventories cut 0.86 percentage point from GDP growth in the second quarter, the smaller pace of stock accumulation is a potential boost to manufacturing.

Businesses have been placing fewer orders with factories while working through stockpiles of unsold goods, which contributed to undercutting manufacturing production. Inventories added 0.53 percentage point to GDP growth in the first quarter.

Business investment fell at a 0.6% rate in the second quarter, the first contraction since the first quarter of 2016. It was pulled down by a 10.6% pace of decline in spending on structures, which includes oil and gas well drilling.

Investment in structures was depressed by decreases in commercial and healthcare, and mining exploration, shafts and wells. Spending on intellectual products, including research and development, increased. Business spending on equipment rebounded at a 0.7% rate in the second quarter. It is seen constrained by design problems at aerospace giant Boeing.

Boeing reported its biggest-ever quarterly loss on Wednesday due to the spiraling cost of resolving issues with its 737 MAX airplane and warned it might have to shut production of the grounded jet completely if it runs into new hurdles with global regulators to getting its best-selling aircraft back in the air.

The plane was grounded worldwide in March after two fatal crashes in Ethiopia and Indonesia. Production of the aircraft has been reduced and deliveries suspended.

Growth in government investment accelerated, notching its best performance in 10 years, but spending on homebuilding contracted for a sixth straight quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Americans job market tightening, inflation steadily rising

FILE PHOTO: A help wanted sign is posted on the door of a gas station in Encinitas California

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing for unemployment benefits fell last week, pointing to sustained labor strength even as economic growth appears to have slowed early in the first quarter.

Other data on Thursday showed a rise in the prices of imported goods in February amid U.S. dollar weakness, bolstering expectations that inflation will pick up this year. Labor market strength and a steady increase in price pressures could allow the Federal Reserve to raise interest rates next week.

Initial claims for state unemployment benefits dropped 4,000 to a seasonally adjusted 226,000 for the week ended March 10, the Labor Department said on Thursday. Claims decreased to 210,000 during the week ended Feb. 24, which was the lowest level since December 1969.

Last week’s drop in claims was in line with economists’ expectations. It was the 158th straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was much smaller.

Fed officials consider the labor market to be near or a little beyond full employment. The unemployment rate is at a 17-year low of 4.1 percent.

The economy created 313,000 jobs in February. Economists are optimistic that tightening labor market conditions will boost wage growth in the second half of this year.

That should help to underpin consumer spending, which slowed at the start of the year. Data on Wednesday showed retail sales fell in February for a third straight month.

Gross domestic product growth estimates for the first quarter are as low as a 1.7 percent annualized rate. Reports on home sales and industrial production in January have also been weak. The economy grew at a 2.5 percent pace in the fourth quarter.

The U.S. dollar gained against a basket of currencies after Thursday’s data while U.S. stock index futures moved higher. Prices of U.S. Treasuries were trading mostly lower. Diminishing labor market slack is also expected to help boost inflation toward the U.S. central bank’s 2 percent target.

IMPORTED CAPITAL GOODS PRICES RISE

In another report, the Labor Department said import prices increased 0.4 percent last month after accelerating 0.8 percent in January. That lifted the year-on-year increase in import prices to 3.5 percent from January.

Last month, prices for imported capital goods jumped 0.6 percent. That was the biggest increase since April 2008 and followed an unchanged reading in January.

Prices of imported consumer goods excluding automobiles rose 0.5 percent, the largest gain since January 2014, after edging up 0.1 percent in the prior month. These price increases likely reflected the dollar’s depreciation against the currencies of the United States’ main trading partners, and will eventually filter through to core producer and consumer inflation.

Imported petroleum prices fell 0.5 percent in February, the first drop in seven months, after rising 3.0 percent in January. Import prices excluding petroleum surged 0.5 percent after a similar gain in January.

The price of goods imported from China rose 0.2 percent. Prices for imports from China increased 0.3 percent in the 12 months through February, the biggest advance since June 2014.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

Utilities, mining boost U.S. industrial production

Robotic arms spot welds on the chassis of a Ford Transit Van under assembly at the Ford Claycomo Assembly Plant in Claycomo, Missouri April 30, 2014.

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. industrial production increased more than expected in December as unseasonably cold weather at the end of the month boosted demand for heating, but manufacturing output barely rose, pointing to moderate growth in the industrial sector.

Strong demand for utilities bolsters expectations of an acceleration in consumer spending in the fourth quarter, which could prompt analysts to raise their economic growth estimates for the October-December period.

The Federal Reserve said on Wednesday industrial output surged 0.9 percent last month also buoyed by robust gains in mining production after slipping 0.1 percent in November.

Economists polled by Reuters had forecast industrial production advancing 0.4 percent in December. Industrial production rose at an annual rate of 8.2 percent in the fourth quarter, the biggest gain since the second quarter of 2010.

For all of 2017, industrial output rose 1.8 percent, the first and largest increase since 2014.

The industrial sector is being supported by a strengthening global economy and a weakening dollar, which is helping to make U.S. exports more competitive relative to those of the nation’s main trading partners. A survey early this month showed an acceleration in factory activity in December, with a measure of new orders recording its best reading since January 2004.

The dollar maintained gains versus a basket of currencies after the data, while prices for U.S. Treasuries were little changed.

Mining production increased 1.6 percent in December amid a rebound in oil and gas well drilling. Utilities production accelerated 5.6 percent last month after declining 3.1 percent in November.

Bitter cold gripped a large part of the country at the end of December. The surge in utilities demand added to strong December retail sales in supporting expectations of an acceleration in consumer spending in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter.

But manufacturing output gained only 0.1 percent in December, putting a wrinkle on the report, after rising 0.3 percent in the prior month. Manufacturing production jumped 1.5 percent in October.

Manufacturing output was last month held back by a 1.5 percent drop in the production of primary metals. Motor vehicle and parts production increased 2.0 percent. Manufacturing production rose at a 7.0 percent rate in the fourth quarter.

With output accelerating last month, capacity utilization, a measure of how fully industries are deploying their resources, increased to 77.9 percent, the highest since February 2015, from 77.2 percent in November.

Capacity utilization is 2 percentage points below its long-run average. Officials at the Fed tend to look at capacity use as a signal of how much “slack” remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. consumer spending barely rises; core inflation moderates

FILE PHOTO: New cars are shown for sale at a Chevrolet dealership in National City, California, U.S., June 30, 2017. REUTERS/Mike Blake/File Photo

WASHINGTON (Reuters) – U.S. consumer spending barely rose in August likely as Hurricane Harvey weighed on auto sales and annual inflation increased at its slowest pace since late 2015, pointing to moderation in economic growth in the third quarter.

The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent last month also as unseasonably mild temperatures reduced demand for utilities. That followed an unrevised 0.3 percent increase in July.

Last month’s gain in consumer spending was in line with economists’ expectations. When adjusted for inflation, consumer spending slipped 0.1 percent in August, the first drop since January.

The government said the data reflected the effects of Hurricane Harvey. However, it could not separately quantify the total impact of Harvey on the data. It said it made adjustments to estimates where source data were not yet available or did not fully reflect the effects of the storm.

The report was the latest suggestion that Harvey, together with Hurricane Irma, would dent economic growth in the third quarter. The economy grew at a brisk 3.1 percent annualized rate in the second quarter, with consumers doing the heavy lifting.

Harvey, which tore through Texas in late August, has undercut industrial production, homebuilding and home sales. Further declines are expected after Irma slammed Florida in early September.

Economists estimate the storms could slice off as much as six-tenths of a percentage point from third-quarter GDP growth. However, a pick-up in output is expected in the fourth quarter as communities ravaged by the hurricanes rebuild.

Inflation remained benign last month. The personal consumption expenditures (PCE) price index excluding food and energy rose 0.1 percent. The so-called core PCE has increased by the same margin for four straight months.

As a result, the annual increase in the core PCE price index slowed to 1.3 percent after advancing 1.4 percent in July. That was the smallest year-on-year increase since November 2015. The core PCE is the Federal Reserve’s preferred inflation measure and has a 2 percent target.

The U.S. central bank signaled last week it anticipated one more interest rate increase by the end of the year. On Tuesday, Chair Janet Yellen said the Fed needed to continue gradual rate hikes despite uncertainty about the path of inflation. It has increased borrowing costs twice this year.

Harvey also probably impacted on income in August.

Personal income rose 0.2 percent last month after increasing 0.3 percent in July. Savings fell to $522.9 billion in August from $524.8 billion in the prior month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. consumer sentiment rises to seven-month high: University of Michigan

A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo. REUTERS/Jim Young/Files

(Reuters) – U.S. consumer sentiment improved to its strongest level in seven months in early August, reflecting confidence in the outlook for the economy and in personal finances as the U.S. stock market holds near record highs, a key survey showed on Friday.

The University of Michigan’s consumer sentiment index rose to 97.6 in the first half of August from 93.4 the month before, which was an eight-month low. The result exceeded expectations for a reading of 94, according to a Reuters poll.

Whether that optimism holds in the weeks ahead, however, is a major question following recent events stemming from a white nationalist rally in Charlottesville, Virginia, said Richard Curtin, chief economist for the University of Michigan’s Surveys of Consumers. There were not enough survey interviews conducted following the protests, in which one woman died as white nationalists clashed with counter-protesters, to assess how much the events might weaken sentiment.

Curtin said the backlash over Charlottesville and U.S. President Donald Trump’s response could weigh on subsequent survey readings.

Trump has blamed the Charlottesville violence on not just the white nationalist rally organizers but also the counter-protesters, and said there were “very fine people” among both groups. His remarks drew rebukes from Republican and Democrat lawmakers as well as business leaders and U.S. allies.

“The fallout is likely to reverse the improvement in economic expectations recorded across all political affiliations in early August,” Curtin said. “Moreover, the Charlottesville aftermath is more likely to weaken the economic expectations of Republicans, since prospects for Trump’s economic policy agenda have diminished.”

FALLOUT FROM CHARLOTTESVILLE

The private sector has reacted to Trump’s remarks as well. Earlier this week, several chief executives quit Trump’s two business advisory groups in protest, resulting in the president disbanding the groups altogether.

Moreover, speculation emerged that key officials, notably director of National Economic Council Gary Cohn, could resign due to Trump’s controversial comments.

Cohn is seen leading the White House’s effort on tax reform and is a front-runner to possibly succeed Janet Yellen as head of the U.S. Federal Reserve.

On Thursday, rumors on social media of Cohn resigning spurred a sell-off on Wall Street and buying of U.S. Treasury bonds — a safe-haven market instrument in times of uncertainty — as traders feared Trump’s economic agenda would stall.

CURRENT, FUTURE DIVERGE

The rebound in University of Michigan’s overall consumer reading in early August was due to a jump in the survey’s expectations component. It rose to 89.0 from 80.5 in July.

On the other hand, the survey’s current conditions measure fell to 111.0 from 113.4 in late July.

“I would say that the economy is in good shape and is not especially sensitive to the latest political buzz, but how much of a hit confidence takes remains to be seen,” Stephen Stanley, Amherst Pierpoint Securities’ chief economist, wrote in a research note.

(Reporting By Dan Burns; Editing by Meredith Mazzilli and Chizu Nomiyama)

U.S. first quarter economic growth revised up on jump in consumer spending

FILE PHOTO: A customer exits after shopping at a Macy's store in the Brooklyn borough of New York, U.S., on May 11, 2017. REUTERS/Brendan McDermid/File Photo

By Lindsay Dunsmuir

WASHINGTON (Reuters) – The U.S. economy slowed less than feared in the first quarter due largely to a jump in consumer spending, providing a slightly more encouraging outlook for growth this year.

Gross domestic product increased at a 1.4 percent annual rate instead of the 1.2 percent reported last month, the Commerce Department said in its final assessment for the period on Thursday.

The reading was the worst since the second quarter of 2016 but above analysts’ expectations, easing fears the economy had been hobbled at the start of this year. The government had pegged first-quarter growth at a paltry 0.7 percent in its first estimate in April.

“The upward revision occurred even with a downward revision to the inventory data, which has favorable implications for the adding up of second-quarter growth,” said Daniel Silver, an economist at J.P. Morgan.

Economists polled by Reuters had expected GDP growth to be unrevised at 1.2 percent in the first quarter. The economy tends to underperform in that period relative to the rest of the year due to perennial issues with the calculation of the data. The government has said it is working to resolve those issues.

The U.S. dollar <.DXY> briefly edged up after the release of the data before retracing earlier losses against a basket of currencies. Prices of U.S. Treasuries were trading lower and stocks on Wall Street were down sharply.

First-quarter economic growth was boosted by an upward revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity. Consumer spending rose at a 1.1 percent pace, the weakest reading since the second quarter of 2013 but almost double the 0.6 percent reported last month.

Despite the upward revision to GDP, the Trump administration’s stated target of swiftly boosting annual U.S. economic growth to 3 percent remains a challenge.

A sustained average growth rate of 3 percent has not been achieved in the United States since the 1990s. The U.S. economy has grown an average 2 percent since 2000 and it expanded only 1.6 percent in 2016, which was the weakest growth in five years.

President Donald Trump’s economic program of tax cuts, regulatory rollbacks and infrastructure spending has yet to get off the ground five months into his presidency.

Details of the White House’s tax plan remain sparse as Trump advisers attempt to win over fiscally conservative Republicans in Congress who want any changes to ultimately be revenue-neutral.

Initial signs that economic growth re-accelerated sharply in the second quarter have also faltered in the face of recent disappointing data on retail sales, manufacturing production and inflation. Housing data has also been mixed.

The Atlanta Federal Reserve is currently forecasting annualized growth of 2.9 percent in the second quarter.

LABOR MARKET STILL STRONG

Other data on Thursday showed the job market was still flashing a green light.

The Labor Department reported that the number of Americans filing for unemployment benefits last week rose slightly, but the underlying trend remained consistent with a tight labor market. The unemployment rate fell to a 16-year low in May.

U.S. exporters also flexed more muscle in the first quarter. Exports for the period were revised to show a 7.0 percent rate of growth from the previously reported 5.8 percent. Exports in the fourth quarter fell at a rate of 4.5 percent.

Business spending on equipment was revised to show it increasing at a rate of 7.8 percent in the January-March period rather than the 7.2 percent previously estimated.

Businesses accumulated inventories at a rate of $2.6 billion in the first quarter, rather than the $4.3 billion reported last month. Inventory investment rose at a rate of $49.6 billion in the fourth quarter of last year.

Inventories subtracted 1.11 percentage point from GDP growth in the first quarter instead of the 1.07 percentage point previously reported.

The government also reported that corporate profits after tax with inventory valuation and capital consumption adjustments fell at an annual rate of 2.7 percent in the first quarter after rising at a 2.3 percent pace in the prior three months.

(Reporting by Lindsay Dunsmuir; Editing by Paul Simao)

U.S. economy grows at tepid 1.2 percent; business spending softens

FILE PHOTO - A family shops at the Wal-Mart Neighborhood Market in Bentonville, Arkansas, U.S. on June 4, 2015. REUTERS/Rick Wilking/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy slowed less than initially thought in the first quarter, but there are signs it could struggle to rebound sharply in the second quarter amid slowing business investment and moderate consumer spending.

Gross domestic product increased at a 1.2 percent annual rate instead of the 0.7 percent pace reported last month, the Commerce Department said on Friday in its second GDP estimate for the first three months of the year.

“The second estimate paints a better picture about the degree of slowing in activity at the start of the year, but the main concern about soft growth in private consumption remains,” said Michael Gapen, chief economist at Barclays in New York.

That was the worst performance since the first quarter of 2016 and followed a 2.1 percent rate of expansion in the fourth quarter. The government revised up its initial estimate of consumer spending growth, but said inventory investment was far smaller than previously reported.

The first-quarter weakness is a blow to President Donald Trump’s ambitious goal to sharply boost economic growth rates. During the 2016 presidential campaign Trump had vowed to lift annual GDP growth to 4 percent, though administration officials now see 3 percent as more realistic.

Trump has proposed a range of measures to spur faster economic growth, including corporate and individual tax cuts. But analysts are skeptical that fiscal stimulus, if it materializes, will fire up the economy given weak productivity and labor shortages in some areas.

The economy’s sluggishness, however, is probably not a true reflection of its health. GDP for the first three months of the year tends to underperform because of difficulties with the calculation of data.

Economists polled by Reuters had expected GDP growth would be revised up to a 0.9 percent rate.

Prices of U.S. Treasuries trimmed gains and U.S. stock indexes slightly pared losses after the data. The dollar gained modestly against a basket of currencies.

While GDP growth appears to have regained speed early in the second quarter, hopes of a sharp rebound have been tempered by weak business spending, a modest increase in retail sales last month, a widening of the goods trade deficit and decreases in inventory investment.

EQUIPMENT SPENDING SLOWING

In a second report on Friday, the Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, were unchanged in April for a second straight month.

Shipments of these so-called core capital goods dipped 0.1 percent after rising 0.2 percent in March. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

The GDP report also showed an acceleration in business spending equipment was not as fast as previously estimated. Spending on equipment rose at a 7.2 percent rate in the first quarter rather than the 9.1 percent reported last month.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose at a 0.6 percent rate instead of the previously reported 0.3 percent pace. That was still the slowest pace since the fourth quarter of 2009 and followed the fourth quarter’s robust 3.5 percent growth rate.

Businesses accumulated inventories at a rate of $4.3 billion in the last quarter, rather than the $10.3 billion reported last month. Inventory investment increased at a $49.6 billion rate in the October-December period.

Inventories subtracted 1.07 percentage point from GDP growth instead of the 0.93 percentage point estimated last month.

The government also reported that corporate profits after tax with inventory valuation and capital consumption adjustments fell at an annual rate of 2.5 percent in the first quarter, hurt by legal settlements, after rising at a 2.3 percent pace in the previous three months.

Penalties imposed by the government on the U.S. subsidiaries of Credit Suisse and Deutsche Bank related to the sale of mortgage-backed securities reduced financial corporate profits by $5.6 billion in the first quarter.

In addition, a fine levied on the U.S. subsidiary of Volkswagen <VOWG_p.DE> related to violations of U.S. environmental regulations cut $4.3 billion from nonfinancial corporate profits.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

Consumer spending slows; inflation pushing higher

A customer shops at a Walmart Supercenter in Rogers, Arkansas June 6, 2013. REUTERS/Rick Wilking

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer spending barely rose in February amid delays in the payment of income tax refunds, but the biggest annual increase in inflation in nearly five years supported expectations of further interest rate hikes this year.

The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent. That was the smallest gain since August and followed an unrevised 0.2 percent rise in January.

Economists had expected a 0.2 percent increase.

The government delayed the issuing of tax refunds this year as part of efforts to combat fraud. Spending last month was held back by a 0.1 percent dip in purchases of big-ticket items like automobiles. While unseasonably warm weather reduced households’ heating bills, it restricted spending last month.

Weak consumer spending suggested that economic growth slowed further in the first quarter. Gross domestic product increased at a 2.1 percent annualized rate in the fourth quarter, stepping down from the July-September quarter’s brisk 3.5 percent pace.

Despite signs of moderate growth, the Federal Reserve is expected to raise interest rates at least twice more this year. The U.S. central bank raised its benchmark overnight interest rates by a quarter of a percentage point this month.

Prices for U.S. Treasuries fell on the data, while the dollar was little changed against a basket of currencies. U.S. stock index futures were slightly lower.

With consumer confidence at 16-year highs and labor market tightness pushing up wage growth, the moderation in spending is likely to be temporary. Even with economic growth slowing at the start of the year, inflation is rising.

The personal consumption expenditures (PCE) price index gained 0.1 percent last month after jumping 0.4 percent in January. That lifted the year-on-year rate of increase in the PCE price index to 2.1 percent, the biggest gain since April 2012. The PCE price index rose 1.9 percent in January.

Excluding food and energy, the so-called core PCE price index increased 0.2 percent last month after rising 0.3 percent in January. In the 12 months through February, the core PCE price index increased 1.8 percent after a similar gain in January.

The core PCE is the Federal Reserve’s preferred inflation measure and is running below its 2 percent target. Inflation is now in the upper end of the range that Fed officials in March felt would be reached this year.

Rising price pressures are also eating into consumer spending. When adjusted for inflation, consumer spending fell 0.1 percent in February after declining 0.2 percent in January.

That suggests a sharp deceleration in the pace of consumer spending after a robust 3.5 percent growth rate in the fourth quarter.

Personal income rose 0.4 percent last month after advancing 0.5 percent in January. Wages increased 0.5 percent, the biggest gain in five months.

Income at the disposal of households after accounting for inflation increased 0.2 percent after dipping 0.1 percent in January. Savings rose to a five-month high of $808.0 billion from $770.9 billion in January.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Fourth-quarter economic growth revised higher, boosted by consumer spending

Commuters wait to ride New York City Subway in New York, December 12, 2013. REUTERS/Eric Thayer

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. economic growth slowed less than previously reported in the fourth quarter as robust consumer spending spurred the largest increase in imports in two years.

Gross domestic product increased at a 2.1 percent annualized rate instead of the previously reported 1.9 percent pace, the Commerce Department said on Thursday in its third GDP estimate for the period. The economy grew at a 3.5 percent rate in the third quarter.

The government also said that corporate profits after tax with inventory valuation and capital consumption adjustments increased at an annual rate of 2.3 percent in the fourth quarter after rising at a 6.7 percent pace in the previous three months.

Profits were held back by a $4.95 billion settlement between the U.S. subsidiary of Volkswagen AG <VOWG_p.DE> and the U.S. federal and state governments for violation of environmental regulations.

Data on trade as well as consumer and construction spending suggest that economic growth moderated further at the start of 2017. The Atlanta Federal Reserve is forecasting GDP rising at a rate of 1.0 percent in the first quarter.

With the labor market near full employment, the data likely understate the health of the economy. GDP tends to be weaker in the first quarter because of calculation issues the government has acknowledged and is trying to resolve.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell 3,000 to a seasonally adjusted 258,000 for the week ended March 25.

Claims have now been below 300,000, a threshold associated with a healthy labor market for 108 straight weeks. That is the longest stretch since 1970 when the labor market was smaller.

The economy grew 1.6 percent for all of 2016, its worst performance since 2011, after expanding 2.6 percent in 2015.

Prices of U.S. government debt fell after the data. U.S. stock index futures pared losses, as did the U.S. dollar <.DXY> against a basket of currencies.

STRONG IMPORT GROWTH The moderate economic expansion poses a challenge to President Donald Trump, who has vowed to boost annual growth to 4 percent by slashing taxes, increasing infrastructure spending and cutting regulations. The Trump administration has offered few details on its economic policies.

Economists polled by Reuters had expected fourth-quarter GDP would be revised up to a 2.0 percent rate.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised up to a 3.5 percent rate in the fourth quarter. It was previously reported to have risen at a 3.0 percent rate.

Some of the increase in demand was satiated with imports, which increased at a 9.0 percent rate. That was the biggest rise since the fourth quarter of 2014 and was an upward revision from the 8.5 percent pace reported last month.

Exports declined more than previously estimated, leaving a trade deficit that subtracted 1.82 percentage point from GDP growth instead of the previously reported 1.70 percentage points.

There was an upward revision to inventory investment. Businesses accumulated inventories at a rate of $49.6 billion in the last quarter, instead of the previously reported $46.2 billion. Inventory investment added 1.01 percentage point to GDP growth, up from the 0.94 percentage point estimated last month.

Business investment was revised lower to reflect a more modest pace of spending on intellectual property, which increased at a 1.3 percent rate instead of the previously estimated 4.5 percent rate.

There were no revisions to spending on equipment. Investment in nonresidential structures was revised to show it falling at a less steep 1.9 percent pace in the fourth quarter. It was previously reported to have declined at a 4.5 percent rate.

(Reporting by Lucia Mutikani; Editing by Paul Simao)