Consumers hold back, companies pick up slack in mixed US economic data

WASHINGTON (BLOOMBERG) - Two of the US economy's main engines are moving in different directions in the final quarter of 2016. Stagnant incomes made Americans less eager to shop last month, while businesses placed more orders for equipment.

Consumer purchases rose a less-than-forecast 0.2 per cent from October and inflation-adjusted disposable income dropped for the first time in three years, Commerce Department data showed on Thursday (Dec 22). Orders for non-defense capital goods excluding aircraft, a proxy for business investment, rose 0.9 per cent in November, the most since August, according to a separate report.

The data provide a mixed picture of growth following a quarter with the fastest expansion in two years, since household purchases are the biggest part of the economy and the advance in business investment may only partially offset the slowdown in shopping. Still, factory production may strengthen after the biggest advance in unfilled orders for capital equipment in three months, and after improved optimism among consumers and companies for policy shifts following Donald Trump's election victory.

"There was a lot of underlying cautiousness for several years now, simply because the tax system and regulatory regime just was not very favourable," while November's figures show how "businesses seem very excited," said Stephen Stanley, chief economist at Amherst Pierpont Securities. "People seem to have a much brighter outlook as we head into 2017. Hopefully that will translate into more activity."

Stanley said he sees gross domestic product growth slowing in the fourth quarter to around 2 per cent, in line with the annual rate and the pattern of the last several years. Business investment probably will be a bit more tepid until tax changes under a Trump administration are made clearer and finalized, he said.

"I do think at some point we're going to get a burst of activity - a lot of pent-up activity that will be unleashed once the details of the corporate tax package will be made known," Stanley said.

In total, the reports did little to alter expectations for fourth-quarter GDP. Wells Fargo economists said the data present a "slight downside risk" to their forecast, while Morgan Stanley boosted its growth projection to 1.4 per cent from 1.3 per cent, citing slower-than-forecast inflation.

Shipments of non-defense capital goods excluding aircraft, used in calculating GDP, were less impressive than orders, with a 0.2 per cent increase in November. While a touch stronger than forecast, it followed an October decrease of 0.3 per cent, which was weaker than the 0.1 per cent decline previously estimated.

In aggregate, the business spending data provide more evidence that companies are putting their money where their mouths are, backing up surveys such as the National Federation of Independent Business's that show a surge in optimism since Trump's victory. Among those who were polled following the election, a gauge of opinion on whether business conditions were expected to improve jumped to 38 from minus 6, according to the group's data released earlier this month.

The economy expanded at a 3.5 per cent rate in the third quarter, faster than previously reported, as growth was marked up for services spending and state- and local-government construction, the Commerce Department said in another report Thursday. Stripping out the volatile trade and inventories categories, so-called final sales to domestic purchasers increased at a 2.1 per cent rate, compared with the prior estimate of a 1.7 per cent pace.

The Federal Reserve last week raised interest rates for the first time in a year, citing rising inflation expectations and a stronger job market, and projected three quarter-point increases in borrowing costs in 2017.

"Spending is still holding up OK, but there are weaknesses in income and that could restrain spending going into the new year," said David Sloan, a senior economist at 4CAST-RGE in New York. The consumer-spending report "warns us that the Fed maybe shouldn't be rushing into another tightening after the last one."

Consumer spending may soon pick up considering Americans attitudes are brightening. Economic expectations rose this month to the highest level in almost two years, Bloomberg Consumer Comfort Index figures showed on Thursday. Views of present economic conditions improved in the week ended Dec 18 to the strongest since the start of 2015, while the overall weekly gauge climbed to its highest since April of last year.

A more seasonal December also should aid a rebound in consumer purchases after the second-warmest November in data back to 1895, according to the National Oceanic and Atmospheric Administration. The unusually mild temperatures last month limited utility spending and probably discouraged Americans from snapping up winter merchandise on retail shelves.

The number of Americans filing applications for unemployment benefits rose more than expected to a six-month high last week, a separate report from the Labor Department showed on Thursday. Despite the spike, which partly reflects typical volatility around the holidays, the labour market remains healthy and is keeping up a streak of 94 weeks with jobless claims below 300,000 - the longest such stretch since 1970.