Weak consumer spending may hold off interest rate hikes

Weak consumer spending may hold off interest rate hikes
A family shops at the Wal-Mart Neighborhood Market in Bentonville. Photo: Reuters
Published: 12:21 AM, August 13, 2017

The United States economy is getting into its stride. Companies are adding workers at a robust rate and the unemployment rate fell to its lowest in over 16 years. But despite a healthy labour market, US consumers are not spending as much — and that could be a problem for future economic growth.

US retail sales figures — a gauge of consumer spending — fell on a monthly basis in May and June, signalling a softening consumption trend in the country. The retail sales figures are closely watched because consumers are a key support for US economic activity. If their spending slows, it can affect growth across the broader economy. As such, weaker household spending may have limited the extent of the US economy rebound in the second quarter, following a disappointing first three months of the year.

Therefore, updates to retail sales numbers this week will be eagerly awaited for clues as to whether the consumer is showing further signs of strains at the start of the third quarter. Another weak number will bode ill for the US economy, adding to a recent flow of disappointing official data that are now in line with subdued Purchasing Managers’ Index (PMI) survey results. It would also affect the course of future monetary policy. The Federal Reserve is eyeing one more rate hike this year and also planning to start unwinding its balance sheet.

In the United Kingdom, retail sales performance will also offer insights into consumption trends in the country. Wage increases have been failing to keep pace with rising prices, leading to a persistent fall in real wages, which in turn has constrained household spending. According to an IHS Markit survey on household finances, British households’ views about their finances continued to deteriorate in July.

These worries about squeezed incomes look set to dominate the coming months and act as a drag on consumer spending, which has played a major role in sustaining the UK economy’s resilience over the past year.

Besides retail sales, analysts are keenly watching statistics on the labour market and wage growth as well as inflation numbers. Further signs of weak consumption could curb market expectations of higher UK interest rates. If anything, the latest PMI survey suggests a slight easing bias as far as monetary policy is concerned.

ABOUT THE AUTHOR: Bernard Aw is Principal Economist, IHS Markit