Washington February 25 2023: U.S. consumer spending increased by the most in nearly two years in January amid a surge in wage gains, while inflation accelerated, adding to financial market fears that the Federal Reserve could continue raising interest rates into summer.
The report from the Commerce Department on Friday was the latest indication that the economy was nowhere near a much-dreaded recession. It joined data earlier this month showing robust job growth in January and the lowest unemployment rate in more than 53 years.
“Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “This report all but insures the Fed will continue on its rate hiking campaign for a lot longer than markets anticipated just a few weeks ago.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, shot up 1.8% last month. That was the largest increase since March 2021. Data for December was revised higher to show spending dipping 0.1% instead of falling 0.2% as previously reported. Economists polled by Reuters had forecast consumer spending rebounding 1.3%.
When adjusted for inflation, consumer spending increased 1.1%, also the biggest gain since March 2021. The so-called real consumer spending had declined in November and December.
Consumers boosted purchases of long-lasting manufactured goods like motor vehicles, household furnishings and equipment as well as recreational goods and vehicles. They also bought clothes. Goods outlays rebounded 2.8%. Spending on services was also strong, rising 1.3% as Americans frequented restaurants and bars. There were increases in spending on healthcare, recreation and transportation services.
The overall surge in spending came as wages and salaries jumped 0.9%. An 8.7% cost of living adjustment, the biggest increase since 1981, for more than 65 million Social Security beneficiaries offset a drop in government social benefits. That reflected the expiration of the extended child tax credit.
Spending was also likely flattered by difficulties ironing out seasonal fluctuations from the data at the start of the year. Some economists expect payback in February.
Nevertheless, the strong performance put consumer spending on a higher growth path at the start of the first quarter. Consumer spending slowed in the fourth quarter, with most of the loss in momentum happening in the last two months of 2022.
The data together with another Commerce Department report showing new home sales vaulting 7.2% in January prompted Goldman Sachs to raise its first-quarter gross domestic product tracking estimate by 0.4 percentage point to a 1.8% annualized rate. The economy grew at a 2.7% pace in the fourth quarter.
Stocks on Wall Street fell. The dollar firmed against a basket of currencies. U.S. Treasury yields rose.
