December Hike or Not

In September, U.S. consumer spending was at its lowest. This is the lowest gain in eight months despite the GDP growth in the second quarter. This has been a result of a barely existent rise in personal income. The data argues against the Federal Reserve raising interest rates at the end of the year. This information is supported by data from the Commerce Department and the Labor Department.

There is a rate hike proposed for December by U.S. central bank policymakers. The hike is a concern as some think the economy is not strong enough yet to handle it. Consumer spending is what makes up two-thirds of U.S. economic activity. Consumers seem to be unsure of income increasing which has led them to be cautious of their spending.

Once jobs begin increasing wages then consumers will become more prone to spending in stores. Joshua Shapiro, chief U.S. economist at MFR Inc. said to clients in a note, “The path of the labor market is going to be the prime driver of consumer spending growth in the months ahead, and if job gains do not re-accelerate, it is likely that consumer spending growth is going to decelerate.” There was a job explosion in the early half of the year.

Taking out only food and energy, core prices rose 1 percent from August. Core prices rose 1.3 percent from the previous year. This figure has missed the target of the Federal Reserve’s 2 percent annual inflation. “We are still in a modest compensation-gain environment and that implies inflation is not likely to accelerate sharply soon,” said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

The consumer spending increased 3.2 percent in the third quarter. This is only 4 percent lower than the prior three months. The annual inflation is still running pretty low and it is a concern for the Federal Reserve.

Consumers did spend on manufactured goods such as washers, dryers, refrigerators, and cars. People have just become cautious of what they are spending their money on. There is hope that the fourth quarter will prove to be more robust.  With the Christmas holiday upcoming there could be an increase in consumer spending that will boost the percentages.

The Federal Reserve will still need to decide if it will raise rates come December. They have noted that the economy is expanding but only modestly. Right now the target is still benchmark in a range of zero to twenty-five percent. It has been this rate since December of 2008. They have also stated that the housing market has improved. The hike that has been tabled for December was supposed to go into effect in June. With the harsh winter that happened the year before, however, it slowed down the growth. So since the risk was too high for the hike to happen even in September, they postponed the hike.

The opinions are mixed on whether there will be improvement or not. With inflation falling some say it may not recover by December but other critics do not think the fall is that bad. Only time will tell if rates will be increased come December.

Source: Reuters