Consumer Spending Falls, Inflation Pressures Muted

Consumer Spending
Richard Vogel/AP

By Lucia Mutikani

WASHINGTON -- 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 Monday showed factory activity slowed sharply in February, with manufacturers saying a labor dispute at the country's West Coast ports had caused supply chain disruptions.

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 drop in January reflected lower gasoline prices, which have weighed on sales receipts at service stations, as well as declines in goods purchases.

%VIRTUAL-pullquote-The increase in real consumer spending is a clear sign that falling gasoline prices are starting to show up at the cash register.%Lower gasoline prices further dampened inflation pressures in January. When adjusted for inflation, consumer spending increased 0.3 percent after December's 0.1 percent drop.

"The increase in real consumer spending is a clear sign that falling gasoline prices are starting to show up at the cash register," said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts.

U.S. stocks were trading higher, while prices for U.S. Treasury debt fell. The dollar rose marginally against a basket of currencies.

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

Retreating inflation also helped boost household income and saving in January.

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

Lower gasoline prices continued to put downward pressure on inflation, with key consumer price gauges slipping further below the Federal Reserve's 2 percent target.

A price index for consumer spending braked to show a 0.2 percent rise in the 12 months through January, the weakest reading since October 2009.

The personal consumption expenditures 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.

Fed Action on Hold?

"With further weakness in price pressures, 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."

The Fed is widely expected to raise interest rates this year after holding them near zero since late 2008.

In a separate report, the Institute for Supply Management said its index of national factory activity fell to 52.9 in February, the lowest reading 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 goods to pile up at the ports.

"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.

Another manufacturing survey produced by financial data firm Markit showed a jump in factory activity in February.

-With additional reporting by Michael Connor in New York.