Mar 03, 2015 06:51 AM EST

Weak U.S. consumer spending points to slower first-quarter growth

U.S. consumer spending fell for a second straight month in January as households continued to cut back on purchases, opting to save much of the massive windfall from cheaper gasoline. 

Other data on Monday showed factory activity slowed in February and construction spending declined sharply in January, adding to signs that economic growth moderated early in the first quarter.

"Growth is slowing in the first quarter after a strong second half of last year. All the gas savings are ending up at the bank rather than being spent," Thomas Costerg, an economist at Standard Chartered Bank in New York.


Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slipped 0.2 percent after falling 0.3 percent in December. The January dip reflected lower gasoline prices, which weighed on sales receipts at service stations, as well as drop in purchases of big-ticket items.

With lower gasoline prices dampening inflation pressures, the so-called real consumer spending increased 0.3 percent after slipping 0.1 percent in December.

But economists said the rise in the measure, which goes into the calculation of gross domestic product, was disappointing.

That and another report from the Commerce Department showing a 1.1 percent drop in construction spending in January prompted some economists to cut their first-quarter growth estimates.

"It (consumer spending report) raises a yellow flag regarding the pace of consumption in the first quarter and by extension the pace of growth," Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

Morgan Stanley cut its first-quarter growth estimate by five-tenths of a percentage point to a 2.3 percent annual pace, while forecasting firm Macroeconomic Advisers lowered their forecast to 2.1 percent from 2.3 percent.

Housing data for January released last month was also weak.

The economy grew 3.6 percent in the second half of 2014, with consumer spending accounting for the bulk of the gain.

As inflation pressures weakened further, a price index for consumer spending rose only 0.2 percent in the 12 months through January, the softest reading since October 2009.

The personal consumption expenditures (PCE) price index had increased 0.8 percent in December.

Excluding food and energy, the so-called core PCE price index increased 1.3 percent in the 12 months through January. The Federal Reserve has a 2 percent inflation target.


Fed Chair Janet Yellen said last week the central bank's policy-setting committee "needs to be reasonably confident that over the medium-term inflation will move up toward its 2 percent objective" before it starts to raise interest rates.

U.S. stocks were trading higher, while prices for U.S. Treasury debt fell. The dollar rose against a basket of currencies. [MKTS/GLOB]

"The latest inflation report offers no reason to assume inflation has stabilized, let alone is reversing course back toward the committee's longer-term target," said Lindsey Piegza, chief economist at Sterne Agee in Chicago. "Continued pressure on prices will further delay Fed action."

Households are using much of the savings from cheaper gasoline to pay down debt and build savings.

Income at the disposal of households after accounting for inflation advanced 0.9 percent in January, the largest gain since December 2012. The saving rate increased to 5.5 percent, the highest in two years.

In a separate report, the Institute for Supply Management said its index of national factory activity fell to 52.9 in February, the weakest in 13 months, from 53.5 in January. A reading above 50 indicates expansion in the manufacturing sector.

From food to machinery and computers and electronic products, manufacturers blamed the labor dispute at the West Coast ports for a slowdown in activity. The dispute, which has since been resolved, caused a massive backlog.

"We know that dispute got a lot worse in January, with both incoming and outgoing container shipments falling by roughly a quarter from December levels. It will take several months for the backlog to be cleared," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Manufacturers in the petroleum and coal products fields complained that lower energy prices were pressuring revenues. Factory activity has also been hurt by weaker growth in Asia and Europe and a strong dollar.

Reports on Monday showed factories in China remained in contraction territory in January, while those in the euro zone grew only modestly.

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