Weak Consumer Sentiment, Tame Inflation Muddy Fed Outlook

Producer Prices
Stephan Savoia/APWorkers at athletic shoemaker New Balance's manufacturing facility in Boston.

By Lucia Mutikani

WASHINGTON -- U.S. consumer sentiment hit its lowest in a year in early September and producer prices were flat in August, signaling moderate economic growth and tame inflation that could weigh on the Federal Reserve's decision whether to hike interest rates next week.

The slump in consumer sentiment and persistently weak inflation reported Friday are in stark contrast with a tightening labor market. Sentiment was likely undermined by recent stock market volatility amid worries over China's slowing economy, while a strong dollar is dampening price pressures.

"The sharp deterioration in consumer confidence and the re-emergence of the disinflationary thrust in goods prices will factor prominently in the Fed's deliberations next week, and both are likely to add to the case for caution as they consider raising rates," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The University of Michigan said its consumer sentiment index fell to 85.7 early this month, the lowest since September last year, from a reading of 91.9 in August.

The survey's gauge of consumer expectations also dropped to a one-year low, as households expected slower growth overseas to hit the U.S. economy. Consumers' expectations for current and future personal finances also took a knock.

But even as households took a dim view of the economy's outlook, there were only mild declines in sentiment towards motor vehicle and home purchases.

"We look to the final September survey results for any evidence of significant pass-through from weaker sentiment to actual purchasing activity, but expect robust income and job growth to outweigh these factors in actual consumption data," said Jesse Hurwitz, an economist at Barclays in New York.

In a separate report, the Labor Department said its producer price index was unchanged in August after gaining 0.2 percent in July. The drag on producer prices from lower crude oil prices and a buoyant dollar was offset by an increase in margins for apparel, footwear and accessories retailing.

In the 12 months through August, the PPI fell 0.8 percent after a similar decline in July. It was the seventh straight 12-month decrease in the index.

Fed's Conundrum

The ebb in consumer sentiment and benign price pressures despite a rapidly tightening labor market pose a dilemma for Fed officials who are contemplating raising rates for the first time in nearly a decade.

Though job openings are at a record high and the unemployment rate is at a 7½-year low, wage gains have been lackluster. Tepid wage growth and dollar strength have combined to keep inflation well below the Fed's 2 percent target.

%VIRTUAL-WSSCourseInline-876%The U.S. central bank's policy-setting committee meets Sept. 16-17. The likelihood of a lift-off in the Fed's benchmark overnight interest rate has been diminished by recent financial market turbulence.

Stocks on Wall Street were trading lower on the data. Investor sentiment was also hurt after Goldman Sachs said crude oil prices could fall to as low as $20 a barrel, citing oversupply and concerns over China's economy.

The dollar was little changed against a basket of currencies and prices for U.S. government debt rose.

Producer inflation is likely to remain muted in the near term after a report Thursday showed import prices fell 1.8 percent in August, the largest drop since January.

The index for final goods fell 0.6 percent last month, with a 7.7 percent decline in gasoline prices accounting for nearly two-thirds of the drop. There also were decreases in the cost of jet fuel, grains, light motor trucks, and iron and steel scrap.

The volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, shot up 0.9 percent in August after rising 0.4 percent in the prior month.

Almost half of the increase in August was attributed to a 7 percent surge in margins for apparel, footwear and accessories retailing.

A key measure of underlying producer price pressures that excludes food, energy and trade services edged up 0.1 percent in August after rising 0.2 percent in July.

The dollar's 17.5 percent rise against the currencies of the United States' main trading partners since June 2014 is restraining gains in the so-called core PPI. Core PPI was up 0.7 percent in the 12 months through August.

-Gertrude Chavez-Dreyfuss contributed reporting from New York.

Originally published