U.S. Consumer Spending Rose at a Slower than Expected Pace in January

• US consumer spending rose 0.2% in January 2012, which was less than market expectations for a 0.4% increase.
• On a volumes basis, spending was unchanged for the third month running.
• Income recorded a 0.3% rise building on December 2011's revised 0.5% jump.
• The January data showed incomes rose in the month and confirmed that the savings rate was higher than was previously thought coming in at 4.6% from an upwardly revised 4.7% in December (previously reported at 4.0%). Another strong increase in employment in February is expected and will provide the means for consumers to boost savings and increase spending growth. The Fed's Beige Book, released yesterday, indicated that spending activity was generally positive in early 2012 with all districts reporting optimistic sales expectations for the coming months.

Personal consumer expenditure (PCE) posted a 0.2% gain in January 2012, which disappointed market expectations for a 0.4% rise, and followed a mild upward revision to the average pace of spending in the fourth quarter of 2011. Spending on durable goods rose 0.9%, which was slower than the 4.7% rise in unit auto sales in the month as much of the increase was in fleet sales, which show up in business investment. Spending on services was flat and likely curtailed by weak spending on utilities due to the unseasonably warm weather in January. Spending on non-durable goods was flat in January following two months of decline. On a volumes basis, consumer spending was unchanged, thereby carrying on the trend of the previous two months.

Personal income posted a 0.3% rise in January 2012 building on December 2011's unrevised 0.5% gain. Disposable income grew by 0.1% in January, and the savings rate stood at 4.6% from an upwardly revised 4.7% (was 4.0%) level in December.

On the inflation front, the core PCE measure was 1.9% higher than a year earlier and the all-items PCE index was up 2.4%.

Initial claims for state unemployment insurance were 351,000 in the week ending February 25, 2012 and followed a revised 353,000 print in the prior week (was 351,000). The four-week moving average in claims dipped to 354,000, which was the lowest since March 2008, and continuing claims fell to 3.402 million.

The steady volume of consumer spending in January started the quarter on par with the fourth-quarter 2011 average level. The lower initial and continuing claims suggests that the pace of hiring will continue to be firmer than during previous years and will support spending growth in the 1.5% to 2.0% range in the first quarter following the fourth quarter's upwardly revised 2.2% annualized gain. With that said, spending growth will continue to be constrained by households rebuilding savings after the large hit to net wealth recorded in 2008-2009, which still has only partially been recovered. Most data for January showed that the US economy continued to grow at about the fourth-quarter 2011 pace early in the year. February reports are expected to confirm that this trend continued, with RBC forecasting a solid 193,000 job increase (208,000 private-sector jobs). Even with the solid gains recorded in recent months, however, the unemployment rate remains elevated. The Fed's regional offices appeared somewhat more upbeat in yesterday's Beige Book, and Fed Chairman Bernanke stuck to the view that the economy is growing at a moderate pace. Given the excessive slack in the economy, moderate growth will not be enough to put significant downward pressure on the US unemployment rate in the near term and, therefore, supports the Fed's contention that "exceptionally low levels for the fed funds rate" will be warranted until "at least late 2014."