U.S. consumers showed some muscle in November at the start of the holiday shopping season, suggesting enough momentum in the economy for the Federal Reserve to raise interest rates next week for the first time in nearly a decade.
The outlook for consumer spending, which accounts for more than two-thirds of economic activity, got a lift from other data on Friday showing consumer sentiment nudged up in early December.
“It dismisses any concerns of a potential slump in household spending after some weakness in the last few months. Not that there is much doubt any more, but this supports the case for a rate hike by the Fed next week,” said Steve Murphy, U.S. economist at Capital Economics in Toronto.
Retail sales excluding automobiles, gasoline, building materials and food services increased 0.6% after gaining 0.2% in October, the Commerce Department said. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.
Overall retail sales, however, gained only 0.2% as automobile sales fell and cheaper gasoline weighed on receipts at service stations. Retail sales rose 0.1% in October.
Consumer spending slowed in September and October, despite a tightening labor market, which is lifting household income.
Better income prospects are helping to prop up consumer sentiment. In a separate report, the University of Michigan’s consumer sentiment index rose to 91.8 early this month from a reading of 91.3 in November.
Consumers’ attitudes toward purchases of major household items were the strongest since 2005, though they were less enthusiastic about buying automobiles than in November.
“Consumer sentiment remains elevated … That speaks well of the current consumer mindset and bodes well for stronger consumer spending in the coming quarters,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
The increase last month in discretionary spending suggested a fairly busy start to the holiday shopping season. It supports expectations that the Fed will raise its benchmark overnight interest rate from near zero when policymakers conclude a two-day meeting next Wednesday, despite weak inflation. The U.S. central bank has not raised rates since June 2006.
U.S. financial markets were little moved by the data as investors kept a wary eye on crude oil prices, which hit a seven-year low. U.S. stocks were trading lower, while prices for U.S. government debt rose. The dollar was lower against a basket of currencies.
Fourth-Quarter GDP Estimates Raised
In another report, the Commerce Department said retail inventories excluding autos increased 0.4% in October, suggesting inventories could be less of a drag on fourth-quarter growth than previously thought. That, however, implies inventories could weigh on output in early 2016.
The strong gain in core retail sales last month and October’s rise in retail inventories ex-autos prompted economists to raise their fourth-quarter growth estimates by as much as three-tenths of a percentage point to as high as a 2.1 percent annual rate.
The economy grew at a 2.1% pace in the third quarter. However, a report on Thursday showed less spending on services and software than had been assumed, suggesting the third-quarter GDP growth estimate could be lowered when the government publishes its second revision later this month.
In a fourth report, the Labor Department said its producer price index advanced 0.3% last month after falling 0.4% in October. But the PPI declined 1.1% in the 12 months through November after sliding 1.6% in October.
November marked the 10th straight 12-month decrease in the index. Dollar strength and continued declines in oil prices amid a glut and slowing global growth have dampened price pressures, leaving inflation running persistently below the Fed’s 2% target.
“We maintain our conviction that dollar appreciation will weigh on the prices of core goods through the middle of next year,” said Rob Martin, an economist at Barclays in New York.