MNI Insight: Lackluster Consumer Spending Worrying Fed Members

By Karen Mracek

     WASHINGTON (MNI) - While not officially part of their dual mandate,

economic growth is obviously very important to Federal Reserve officials, and

some are starting to worry lackluster consumer spending could weigh down growth

in coming quarters, MNI understands.

     U.S. monetary policy makers are beginning to worry about the disconnect

between consumer confidence and consumer spending. Confidence is soaring -- the

Conference Board's confidence index this month was 121.1, the second highest

reading since 2000 -- but retail sales have disappointed, falling in June for

the second straight month.

     While the consumer confidence index hit a 16-year high in March, the

optimism of consumers is not showing up in higher spending -- at least not so

far in the official data.

     Confidence began rising late last year with President Donald Trump election

and his promise to tackle regulatory relief, along with health care and tax

reform early in his presidential term. 

     While holding up so far, a slip in confidence could come with the

realization any effect from fiscal policy stimulus will come in 2018 or later,

if at all. And any impact on the hard data has yet to be seen.

     The International Monetary Fund marked down its forecast for U.S. economic

growth this year and next for this very reason. The IMF expects 2.1% growth this

year in its most recent update to its World Economic Outlook, down from April's

forecast of 2.3%. It lowered expected GDP growth in 2018 to 2.1%, down from the

2.5% growth expected in April.

     "While the markdown in the 2017 forecast reflects in part the weak growth

outturn in the first quarter of the year, the major factor behind the growth

revision, especially for 2018, is the assumption that fiscal policy will be less

expansionary than previously assumed, given the uncertainty about the timing and

nature of U.S. fiscal policy changes," the IMF said.

     For Fed policymakers, inflation is key to future rate hikes, but the slower

consumer spending has some worried, and they will be closely watching Friday's

release of second quarter GDP when it comes out at 8:30 a.m. ET, along with

annual revisions for data in the first quarter of 2017 and the full-year 2016.

     First quarter GDP growth was a disappointing 1.4% but, as is typical of the

first three months of the year, the reading was mostly dismissed as one filled

with unaccounted for seasonal factors. A weak second quarter could cause them to

mark down their forecast for GDP growth this year and next, in their Summary of

Economic Projections to be updated with the Sept. 19-20 FOMC meeting.

     In the June SEP, the FOMC's median GDP forecast for 2017 rose to 2.2% from

2.1% in March, but that figure is likely to come down again in September.

     There are still strong fundamentals for consumer spending, including rising

real disposable income which jumped 0.6% in May -- its largest monthly leap in

more than two years. But the other side of that report was the dismal 0.1%

consumer spending in May after back-to-back 0.4% gains in April and March.

     With the contradiction of data points -- along with the better than

expected job gains -- policymakers will wait and see if retail spending and

consumer spending rebound, but a continuation of weaker growth could push the

FOMC to reconsider both its forecast for GDP growth and, if it persists for more

than a few quarters, the fed funds rate path.

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

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