US consumer spending barely rose last month as households cut back on purchases of a range of goods, suggesting the economy started the first quarter on a softer note.
Sluggish spending came despite cheap gasoline and a buoyant labor market, leaving economists to speculate that consumers were using the extra income to pay down debt and boost savings.
“There is a risk of a temporary soft patch for the economy as it is somewhat surprising the consumer has stopped spending their savings from gasoline prices,” MUFG Union Bank New York-based chief financial economist Chris Rupkey said.
The US Department of Commerce said on Thursday that retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1 percent last month.
That followed a 0.3 percent drop in December and was below Wall Street’s expectations for a 0.4 percent increase.
The so-called core retail sales correspond most closely with the consumer spending component of GDP.
Overall retail sales slipped 0.8 percent last month, declining for a second straight month as falling gasoline prices undercut sales at service stations.
The soft core retail sales prompted Barclays to lower its first-quarter GDP growth estimate by 0.3 percentage points to a 2.2 percent annual rate.
JPMorgan cut its estimate to a 2.5 percent rate from a 3 percent pace.
The economy grew at a 2.6 percent annual pace in the fourth quarter of last year. However, inventory and trade data for December last year was below the government’s assumptions in the GDP report, suggesting growth could be revised to as low as a 1.8 percent rate.
US financial markets were little moved by Thursday’s data, with attention focused on details of a ceasefire agreement between Russia and Ukraine and a surprise interest rate cut and bond purchasing program announced by Sweden’s central bank.
Despite a 39.5 percent decline in gasoline prices since June, consumer spending has been soft in the past two months.
Still, cheaper gasoline prices and robust employment gains are expected to provide a powerful stimulus to consumer spending and keep the economy on an expansion path, despite sputtering growth in Asia and Europe.
“Should we be worried about the weakness of underlying sales over the past two months? Possibly, but all the conditions are in place for a period of very strong consumption growth,” Capital Economics chief US economist Paul Ashworth said. “We still expect to see that strength come through in the retail sales data soon.”
Consumer spending, which accounts for more than two-thirds of US economic activity, expanded at its quickest pace since 2006 in the fourth quarter.
Softer consumer spending posed a risk to a much anticipated mid-year interest rate increase by the US Federal Reserve.
“In practice, the Fed cares a lot about GDP growth. GDP has disappointed, while the labor market hasn’t,” JPMorgan New York-based economist Michael Feroli said. “All else equal, the continued unexciting pace of GDP growth does present a modest challenge to our June Fed call.”
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