There's more evidence now that U.S. economic tail winds highlighted this week by Federal Reserve Chairman Jerome Powell are gathering strength.
Reports out Thursday showed recent tax cuts buoyed Americans' spending power in January, unemployment claims fell last week to an almost five-decade low, and factories expanded in February at the fastest rate since 2004. In addition, a key price gauge watched by the Fed rose in January by the most in a year.
The update on the economy came as Powell faced lawmakers again after comments earlier in the week that "some of the head winds the U.S. economy faced in previous years have turned into tail winds." Fatter wallets and a solid labor market signal inflation-adjusted consumer spending may pick up after falling in January, while progress on prices reaffirms that the Fed will opt for a widely expected rate rise this month -- and remain on track for at least two additional increases this year.
The rise in disposable income "indicates some dry powder for spending to pick up," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. "Consumption got off to a weak start but it should pick up as tax cuts show up in paychecks."
The price data "will add to the sense that the weak patch in inflation is behind us," and "barring some kind of disaster, a March hike is pretty much a done deal," Feroli said.
Real disposable income, or after-tax earnings adjusted for inflation, grew in January by the most since 2015 because of lower taxes and more bonuses related to the law, the Commerce Department reported. The data, covering the first month since the tax law was signed in December, reflected a $30 billion increase in one-time bonuses and a $115.5 billion annualized drop in personal taxes.
The job market remains a major support for consumers. Labor Department figures showed filings for unemployment benefits fell to 210,000 last week, the fewest since 1969. Even with steady hiring and low firings, there's little sign yet of a sustained acceleration in worker pay, though previous Labor Department figures for January showed the biggest annual increase in average hourly earnings since 2009.
"Fundamental demand is still really good," said Timothy Fiore, chairman of the Institute for Supply Management factory-survey committee. "We also saw a big increase in employment, which bodes well."
Inflation has mostly missed the central bank's 2 percent target since 2012, though policymakers expect it to rise toward their goal. The Fed's preferred price gauge -- tied to consumption -- rose 0.4 percent in January from the previous month and was up 1.7 percent from a year earlier, according to the Commerce Department.
The core index, which Fed officials see as a better indicator of underlying price pressures because it excludes often-volatile costs for food and fuel, was up 0.3 percent in January -- the most in a year -- and 1.5 percent from January 2017, the same annual gain as the previous three months.
Weakness in overall household consumption in January was foreshadowed by lackluster retail sales. However, softness in personal spending should be temporary, likely the result of two factors: Adverse weather hindered retail sales at the start of the month, and the January data may be payback after a stellar fourth quarter. Robust disposable-income growth, driven by tax cuts, will likely boost consumption as the first quarter progresses.
While households will benefit from lower taxes, most economists reckon consumption in the first quarter is unlikely to match the 3.8 percent annualized pace of the previous period. The Commerce Department data showed nominal consumer spending grew 0.2 percent in January, matching the median forecast in a Bloomberg survey, and following a 0.4 percent gain. Adjusted for inflation, personal spending declined 0.1 percent from the prior month.
"We just need to take a deep breath," said Omair Sharif, senior U.S. economist at Societe Generale in New York. "Things are still chugging along at a steady pace. Things are just coming down to earth."
Economists expect that some people may also put the extra cash from lower taxes toward paying down debt or sock it away for a rainy day. In January, the reduction in taxes helped boost the saving rate to 3.2 percent, the highest since August. December's 2.5 percent rate was the lowest since 2007.
Overall, nominal incomes rose 0.4 percent in January from the prior month, as wages and salaries increased 0.5 percent.
"We continue to expect solid rates of private consumption throughout 2018 as the effects of the tax plan gradually phase in," Michael Gapen, chief U.S. economist at Barclays PLC, said in a note.
Information for this article was contributed by Sophie Caronello of Bloomberg News.
Business on 03/02/2018