US economy remains sluggish

US data shows very little progress in economy amid slight change in manufacturing while consumer spending remains flat

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

US consumer spending was unexpectedly flat in April as households cut back on purchases of automobiles and continued to boost savings, suggesting the economy was struggling to gain momentum early in the second quarter.

But there are signs a rebound from the first-quarter's slump is under way, with other reports on Monday showing manufacturing activity picked up in May and construction spending surged in April to a nearly 6-1/2-year high.

Still, soft consumer spending and muted inflation pressures, after a price index for consumer spending in April recorded its smallest gain since late 2009 on an annual basis, suggest the Federal Reserve will probably not raise interest rates before the end of the year.

"Neither of these developments make the June policy meeting a more likely date to begin hiking rates than was already the case," said John Ryding, chief economist at RDQ Economics in New York.

The Commerce Department said the unchanged reading in consumer spending followed a 0.5 percent increase in March. Consumer spending was also curbed by weak demand for utilities as temperatures warmed up.

Economists polled by Reuters had forecast consumer spending, which accounts for more than two-thirds of US economic activity, increasing 0.2 percent in April.

In a separate report, the Institute for Supply Management (ISM) said its index of national factory activity was 52.8 in May, up from April's reading of 51.5. A figure above 50 indicates expansion in the manufacturing sector.

The new orders index rose to its highest level since December.

The dollar rose against a basket of currencies, while prices for US government debt fell.

When adjusted for inflation, consumer spending also was unchanged in April after rising 0.4 percent in March.

In a second report the Commerce Department said construction spending jumped 2.2 percent to an annual rate of $1.0 trillion, the highest level since November 2008. The percent increase was the largest since May 2012.

The manufacturing and construction reports added to business spending plans, employment and housing data in suggesting some momentum in the economy early in the second quarter even as consumer spending and industrial production have been soft.

The economy is slowly rebounding from its first-quarter slump, hamstrung by a strong dollar and deep spending cuts in the energy sector, which has been slammed by a plunge in crude oil prices, as well as the penchant by households to hoard cash.

Gross domestic product contracted at a 0.7 percent annual rate in the first three months of the year.

But with the output figure held down by a confluence of temporary factors, including a problem with the model the government uses to smooth the data for seasonal fluctuations, the decline in GDP likely overstates the economy's weakness.

With the tightening jobs market expected to boost wage growth, consumer spending is expected to accelerate in the coming months, also supported by the massive savings households accumulated from cheaper gasoline.

In April, personal income rose 0.4 percent after being flat the prior month. That reflected a jump in wages and salaries. With income outpacing consumer spending, the saving rate increased to 5.6 percent from 5.2 percent in March.

With consumption muted, price pressures were benign in April, pulling inflation further below the Fed's 2 percent target.

A price index for consumer spending was unchanged after rising 0.2 percent in March. In the 12 months through April, the personal consumption expenditures (PCE) price index edged up 0.1 percent, the smallest gain since October 2009.

Excluding food and energy, prices ticked up 0.1 percent for a third straight month. The so-called core PCE price index increased 1.2 percent in the 12 months through April, slowing from an increase of 1.3 percent in March.

The core PCE price index is closely monitored by the Fed for monetary policy. The soft reading is in sharp contrast with April's consumer price index report published in May, which showed a pick-up in inflation over the last couple of months.

The core PCE price index and core CPI are showing a divergence because medical care prices are treated differently in both reports.

"The PCE measure is being depressed by sharp declines in the administered prices that the government pays Medicare and Medicaid providers," said Paul Ashworth, chief US economist at Capital Economics in Toronto.