Factory Growth Slows, Will We Still See A Rate Hike?

US factory activity slowed a bit in April on the heels of steady—but low—consumer spending from March. In addition, a key inflation measure saw its first monthly drop in roughly 16 years. Still, economists expect the Foryederal Reserve will announce an interest rate hike as the labor market tightens through June.

These weak reports came Monday morning, just ahead of the Federal Reserve’s two-day policy meeting, which is set for Tuesday. Accordingly, the United States central bank is not yet expected to raise interest rates by the close of the meeting, on Wednesday.

Capital Economics Chief US economist Paul Ashworth comments, “We don’t expect that will prevent the Fed from hiking interest rates again at the June meeting, at least not as long as employment growth rebounds in April and May.”

In addition, Raymond James Financial Inc’s chief economist Scott Brown notes, “Spending numbers were soft in February and March, but it’s not necessarily the end of the world,” since these figures come after such a strong fourth quarter. “If we don’t see a rebound in the numbers we get for April and May, that would be concerning. But the fundamentals are still sound for the consumer.”

Overall, consumer spending in March was held back by a 0.7 percent drop in durable goods purchases like cars. Still, we saw gains in personal incomes, by 0.2 percent, in March; following a 0.3 percent increase in February. Household disposable incomes (post inflation) also gained 0.5 percent, which is the biggest such increase since December of 2015. It had actually been up 2.4 percent over the past year, which is slightly better than the 2.2 percent year-over-year gains we had in February. Finally, personal savings also increased to a single-year high of $849.1 billion, up from $819.0 billion, in February (at a rate of 5.9 percent, up from 5.7 percent from the month prior).

With all that in mind, a Bloomberg survey projected that consumer spending could decline by 0.2 percent or grow as much as 0.4 percent. Last month, this same reading showed a 0.1 percent advance. Adjusting for inflation, then, purchases are up 0.3 percent, in March, which is certainly better than the 0.1 fall in February.

As such, economists now expect that the core inflation rate will continue to creep its way upwards over the next couple of months.

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