US economy showing signs of life in the new year

The U.S. economy is showing signs of strengthening that may allay fears about the chances of a recession.

Economic growth was better than first reported at the end of last year, and consumers picked up their spending in January, brightening the nation’s otherwise wobbly performance in late 2015.

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Consumers increased their spending 0.5 percent last month, up from 0.1 percent in December, the best showing since May, the Commerce Department said Friday. And the economy expanded at a 1 percent annual rate in the October to December period, up from the first estimate of 0.7 percent.

The strong January numbers on personal income and consumer spending show the U.S. economy is far from recession,” said Gus Faucher, senior economist at PNC Financial.

“Job gains and stronger wage growth as the labor market continues to tighten are boosting household income, which in turn is supporting gains in consumer spending,” he said. 

Incomes rose 0.5 percent in January, up from 0.3 percent in December, according to the Commerce report.

Faucher noted that low energy prices are another positive for consumers, "freeing up cash to spend on other goods and services."

Jay Shambaugh, a member of the White House’s Council of Economic Advisers, said that “the outlook for consumers remains favorable" and some of the fourth-quarter slowing was due to unseasonably warm weather that temporarily reduced spending on utilities.

To further promote growth, he said, President Obama will continue to push for the passage of the Trans-Pacific Partnership trade agreement and raising the minimum wage. 

Growth for the year was unchanged, at 2.4 percent.

Still, the economy slowed from a 2 percent pace in the July-September period and from the 3.9 percent posted last spring following an anemic start to 2015 amid a West Coast ports strike and severe winter weather.

Chad Moutray, chief economist for the National Association of Manufacturers, expressed concern that “despite the marginally better figure, the underlying headline remains the same: the U.S. economy slowed to a crawl at the end of 2015.”

Yet economists are upbeat about the economy’s trajectory for the first three months of this year — growth is forecast between 2 percent and 2.5 percent — with steady job gains and wage growth expected to fuel more consumer spending in the months ahead. 

“For all of 2016 consumer spending and housing will be the primary drivers of economic growth,” Faucher said.

Faucher said that consumer spending will more than offset the drags from trade and a downturn in investment in energy."

Spending accounts for nearly 70 percent of growth.

The improvement in the fourth-quarter estimate was largely due to the better-than-estimated stockpiling of inventories, offsetting the slight decline in consumer spending.

In the fourth quarter, consumer spending slipped to 2 percent, down from the initial estimate of 2.2 percent and below the 3 percent in the third quarter. 

Moutray and Faucher both said that growth for this year should come in around 2 percent. PNC estimates that level of growth will support average monthly job creation of around 160,000 and push the unemployment rate down to about 4.7 percent at the end of this year, from 4.9 percent in January.

The economic news also gives Federal Reserve leaders more to weigh in their future policy meetings. 

The latest spending report showed that monthly core inflation was its strongest in four years, a pickup that will likely support an interest rate increase at the Fed's June meeting, Faucher said.

The Fed "will want to make sure that the U.S. economy is still solid given recent financial market turmoil, but another couple of months of good data and further evidence that inflation is picking up will support a rate increase in June, as well as another toward the end of this year," he said.