US consumer spending slowed in January and could lose further momentum as the fast-spreading coronavirus outbreak, which has sparked a stock market sell-off and revived fears of a recession, causes households to tighten their purse strings.
Other data on Friday showed the goods trade deficit contracted sharply last month as both imports and exports declined. While the narrowing goods trade deficit could be a boost to the calculation of gross domestic product, a lot depends on how the coronavirus unfolds in the United States.
The coronavirus epidemic, which has killed nearly 3,000 and infected at least 80,000 people, most of them in China, is viewed by financial markets as the catalyst that could interrupt the longest economic expansion on record, now in its 11t year. Together with persistently tame inflation, it could challenge the Federal Reserve's signaled desire to keep monetary policy on hold at least through 2020.
The US central bank cut interest rates three times in 2019. Financial markets have fully priced in a 25 basis points rate cut at the Fed's March. 17-18 policy meeting, according to CME Group's FedWatch Tool.
The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.2% last month as unseasonably mild weather reduced demand for heating and undercut sales at clothing stores. Consumer spending shot up 0.4% in December.
Economists polled by Reuters had forecast consumer spending gaining 0.3% in January. While a separate report on Friday from the University of Michigan showed its consumer sentiment index increased to a near two-year high in February, it noted that a fifth of respondents mentioned the coronavirus in the final days of the survey in part because of the plunge in stock prices.
Still, consumer fundamentals remain healthy. Personal income jumped 0.6% in January, the most since February 2019, after gaining 0.1% in December. Income was boosted by the annual cost of living adjustment for social security recipients and other government welfare programs.
Wages rose 0.5% in January after gaining 0.1% in the prior month. Savings raced to $1.33 trillion last month, the highest since March 2019, from $1.26 trillion in December.
Inflation remained benign last month. Consumer prices as measured by the personal consumption expenditures (PCE) price index edged up 0.1% in January. The PCE price index was held back by a 0.7% drop in the cost of energy goods and services, offsetting a 0.3% gain in food prices. The PCE price index increased 0.3% in December. In the 12 months through January, the PCE price index accelerated 1.7%.