Free Trial

REPEAT:MNI Insight: Lackluster Consumer Spending Worrying Fed

Repeats Story Initially Transmitted at 15:55 GMT Jul 27/11:55 EST Jul 27
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

To read the full story

Close

Why MNI

MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
}); window.REBELMOUSE_ACTIVE_TASKS_QUEUE.push(function(){ window.dataLayer.push({ 'event' : 'logedout', 'loggedOut' : 'loggedOut' }); });