Weak Economic Data Cloud December Rate Hike Possibility

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By Lucia Mutikani

WASHINGTON -- U.S. consumer spending in September recorded its smallest gain in eight months as personal income barely rose, suggesting some cooling in domestic demand after recent hefty increases.

The Commerce Department data and another report Friday from the Labor Department also showed weak inflationary pressures, which would argue against the Federal Reserve raising interest rates at the end of the year.

U.S. central bank policymakers this week put a rate hike in December on the table with a direct reference to their final meeting of the year. The Fed has kept benchmark overnight interest rates near zero since December 2008.

%VIRTUAL-pullquote-It will be difficult for the Fed to justify a rate hike at a time when income, consumption and inflation are trending lower...%"It will be difficult for the Fed to justify a rate hike at a time when income, consumption and inflation are trending lower, leaving a December rate hike less likely than prior to the data," said Jay Morelock, an economist at FTN Financial in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent last month after rising 0.4 percent rise in August. September's consumer spending data was included in Thursday's third-quarter gross domestic product report.

Consumer spending rose at a brisk 3.2 percent annual pace in the third quarter, helping to lift GDP growth to a 1.5 percent rate. Consumption has increased at a rate of more than 3 percent in each of the last two quarters.

Third-quarter growth was constrained by business efforts to whittle down an inventory bloat, a strong dollar and ongoing spending cuts by energy companies.

Stocks on Wall Street were trading marginally lower, while prices for longer-dated U.S. government debt rose. The dollar fell against a basket of currencies.

Weak Inflation

When adjusted for inflation, consumer spending rose 0.2 percent in September after increasing 0.4 percent in August, suggesting consumption will continue to support the economy through the rest of the year.

That view also was bolstered by a separate report showing the University of Michigan's consumer sentiment index rebounded in October from September. Consumer spending growth, however, is unlikely to maintain the brisk pace witnessed in the second and third quarters in the absence of a significant rise in income.

Income ticked up 0.1 percent as wages and salaries fell last month, especially in manufacturing, after rising 0.4 percent in August.

"Stronger income growth is needed to support stronger consumer spending," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

With spending sluggish, inflation was weak last month. A price index for consumer spending slipped 0.1 percent, the first decline since January, after being flat in August.

In the 12 months through September, the personal consumption expenditures price index rose 0.2 percent, the smallest increase since April, after increasing 0.3 percent in August.

Excluding food and energy, prices rose 0.1 percent for a fifth straight month. The so-called core PCE price index rose 1.3 percent in the 12 months through September after a similar gain in August.

Inflation has persistently run below the Fed's 2 percent target. A report from the Labor Department showed the Employment Cost Index, the broadest measure of labor costs, increased 0.6 percent after a 0.2 percent gain in the second quarter.

In the 12 months through September, labor costs held steady at 2 percent, below the 3 percent threshold that economists say is needed to bring inflation closer to the Fed's target.

"We are still in a modest compensation-gain environment and that implies inflation is not likely to accelerate sharply soon," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

"The labor market may be tight but firms appear to be in no great hurry to raise compensation."

9 Numbers That'll Tell You How the Economy's Really Doing
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Weak Economic Data Cloud December Rate Hike Possibility
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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