U.S. consumer spending slowed in January while inflation remained low, possibly setting the stage for the Federal Reserve to cut interest rates amid concerns that the coronavirus outbreak could trigger a recession.
The Commerce Department reported Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% last month as unseasonably mild weather reduced demand for heating and undercut sales at clothing stores.
Economists polled by Reuters had forecast consumer spending — which shot up 0.4% in December — would gain 0.3% in January.
A separate report on Friday from the University of Michigan showed its consumer sentiment index increased to a near two-year high in February but 20% of respondents mentioned the coronavirus in the final days of the survey in part because of the plunge in stock prices.
With inflation remaining benign — the personal consumption expenditures (PCE) price index edged up 0.1% in January — the coronavirus outbreak “could challenge the Federal Reserve’s signaled desire to keep monetary policy on hold at least through 2020,” according to Reuters.
“Consumers shielded the economy from global headwinds for most of 2019 but they won’t prove immune to the coronavirus outbreak,” said Lydia Boussour, a senior U.S. economist at Oxford Economics. “This persistently low inflation bolsters the case for a Fed rate cut as soon as March given the sharp tightening in financial conditions.”
Consumer spending in January was boosted by higher outlays on new cars and trucks and on food and hotels. Reuters noted that “consumer fundamentals remain healthy,” citing a 0.6% gain in personal income last month, the largest since February 2019.
Wages rose 0.5% in January after gaining 0.1% in the prior month.
But consumer spending cooled considerably in the last quarter of 2019 and, according to MarketWatch, “It could slow even further if the coronavirus outbreak undermines consumer confidence and forces businesses to take defensive measures.”
“If the virus spreads into U.S. communities, consumers are likely to limit their exposure to stores, theaters, restaurants, sporting events, air travel, and the like,’ Jim Curtin, chief economist of the Michigan confidence survey, said.