US consumer spending picked up in January for the fourth month running, lifting hopes that consumers could start adding momentum to an economic recovery that so far has been fuelled by manufacturing.
Personal consumption expenditure rose by 0.5 per cent, commerce department figures showed, exceeding the expectations of Wall Street economists. Separately, the Institute of Supply Management’s latest survey found that the US manufacturing sector expanded in February for the seventh consecutive month.
Incomes also rose during the month, but at a modest 0.1 per cent. When factoring in rising tax payments, disposable personal income actually declined in January. With spending outpacing incomes, the savings rate dropped sharply in January, falling from 4.2 per cent in December to 3.3 per cent.
Economists have mixed sentiments about the savings rate, as consumer spending accounts for about 70 per cent of economic activity in the US. However, analysts are wary of US consumers returning to the free-spending habits that they exhibited before the financial crisis.
Last week revised official figures showed that the US economy grew at an adjusted annual rate of 5.9 per cent in the fourth quarter of last year. However, consumer spending was weaker than in the previous quarter, suggesting that consumers were failing to carry their weight.
“As long as income growth remains sluggish, in order to propel GDP [gross domestic product] consumers will have to continue to wind down the savings built up in 2009,” said Brian Sozzi, an analyst at Wall Street Strategies. “Whether this happens is an unknown variable given uncertain prospects on jobs and the overall direction of the US economy.”
In spite of an increasing willingness to spend, recent surveys have shown that consumers are feeling more anxious about the economy, as the labour market continues to lag behind other areas of improvement, such as manufacturing.
Meanwhile, ISM found that manufacturing activity continued to expand last month, but at a slower pace than in January. Its index fell from 58.4 to 56.5, as new orders and production were weaker. A reading above 50 signals expansion, however the results missed analysts projections.
Norbert Ore, chairman of the ISM’s survey committee, said he was encouraged by the strength of hiring among manufacturers, which saw expansion during the month. That is a positive sign, as analysts have been waiting to see if increased demand on factories would translate into hiring.
“With these levels of activity, manufacturers are seemingly willing to hire where they have orders to support higher employment,” Mr Ore said.
Alan Ruskin, a strategist at RBS Securities, said that although the data were weaker than he expected, the gap between inventories and orders signals that there remains more room for production to ramp up.
By Alan Rappeport – ft.com
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