U.S. consumers flex muscle; import prices signal weak inflation

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending regained momentum in January as households ramped up purchases of a variety of goods, in a hopeful sign that economic growth was picking up after slowing to a crawl at the end of 2015.

But the outlook for consumer spending was tempered by another report on Friday showing sentiment among households ebbed in early February. Still, the increase in consumer spending last month underscored the economy's resilience and should ease fears of a looming recession.

"The markets may have decided that the U.S. is headed for recession, but obviously no one told U.S. consumers," said Paul Ashworth, chief economist at Capital Economics in Toronto.

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services increased 0.6 percent last month after an unrevised 0.3 percent decline in December.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast core retail sales increasing 0.3 percent last month.

U.S. stocks were trading higher after the data, while prices of U.S. government debt were lower. The dollar rose against a basket of currencies.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, moderated in the fourth quarter. That, together with weak export growth due to a strong dollar, efforts by businesses to sell inventory and cuts in capital goods spending by energy firms, restrained GDP growth to a 0.7 percent annual pace.

Consumer spending is being supported by a strengthening labor market, which is starting to lift wages. Still, households remain cautious about boosting spending, against the backdrop of an uncertain global economic outlook and a sustained decline in oil prices, which have sparked a broad stock market sell-off.

In a separate report, the University of Michigan said its consumer sentiment index fell to a reading of 90.7 in early February from 92 in January as households worried about the economic outlook.

Consumers, however, remained upbeat about their personal financial situation and expected that low inflation would boost their purchasing power.

WEAK INFLATION

Signs of firming consumer spending are likely to be welcomed by Federal Reserve policymakers. But given the volatility in equities markets and weak U.S. inflation, the central bank could find it hard to raise interest rates this year.

The Fed increased its key short-term interest rate in December, the first hike in nearly a decade.

In a separate report, the Labor Department said import prices dropped 1.1 percent last month after decreasing 1.1 percent in December. Import prices have decreased in 17 of the last 19 months, reflecting the robust dollar and plunging oil prices.

Lower oil prices have translated into cheaper gasoline, boosting household discretionary spending but also weighing on sales at service stations.

In January, a 3.1 percent drop in receipts at service stations restricted the gain in overall retail sales to 0.2 percent. Retail sales for December were revised to show a 0.2 percent rise instead of the previously reported 0.1 percent dip.

The increase in retail sales was also tempered by harsh winter weather, which hurt spending at restaurants and bars.

Auto sales advanced 0.6 percent in January after rising 0.5 percent in December. Receipts at clothing stores gained 0.2 percent. Sales at online retailers jumped 1.6 percent, but receipts at sporting goods and hobby stores fell 2.1 percent. Sales at electronics and appliance outlets edged up 0.1 percent.

A snowstorm that blanketed much of the northeastern United States last month boosted sales at building materials and garden equipment stores, which rose 0.6 percent. But receipts at restaurants and bars fell 0.5 percent, the largest drop since January 2014.

(Reporting by Lucia Mutikani; Editing by Paul Simao)