U.S. Consumer Spending Picks Up, While Manufacturing Declines -- Update

WASHINGTON -- Consumer spending in the U.S. picked up slightly in January after a weak holiday season, while manufacturing started the year on a decline.

Retail sales, a measure of purchases at stores, at restaurants and online, increased a seasonally adjusted 0.3% in January from a month earlier, the Commerce Department said Friday. That was the strongest pace of growth since October, after December's holiday retail sales were revised slightly lower.

Industrial production, a measure of factory, mining and utility output, decreased a seasonally adjusted 0.3% in January from the prior month, the Federal Reserve said Friday. Utilities production dropped 4% last month, as Americans cut back on energy consumption during a warmer-than-usual January.

The halt in production of Boeing Co.'s 737 MAX airplane, w hich started in January, led to a 7.4% decrease in the aerospace industry's production last month. Economists expect Boeing's troubles to affect first-quarter U.S. economic growth, along with China's coronavirus outbreak.

January was the fifth warmest for the month on record for the U.S., according to the Commerce Department. Mild winter weather was a boon to consumer spending in certain categories, such as automobiles and restaurants and bars. But it hurt spending in other categories like clothing as consumers held off on purchases of winter coats and boots.

"Once you incorporate the utility effect, the [weather] impact has probably been marginally negative" on overall consumer spending, said Stephen Stanley, chief economist at Amherst Pierpont.

Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.

One positive for future spending is that consumer confidence remains high. A University of Michigan survey released Friday said the index of consumer sentiment increased to 100.9 this month from 99.8 at the end of January.

While data on retail sales can be volatile from month to month, the broader trend shows that consumer spending remains relatively robust: from a year earlier, retail sales increased 4.4% in January.

Higher retail sales last month will feed into the broader pace of economic growth for the first quarter. Still, the report showed spending was uneven across the board. Gasoline sales dropped by 0.5%, the most since August, amid lower gas prices last month.

Unlike other reports produced by the government, retail sales aren't adjusted for price changes. Sales at electronics and health care stores posted sharp declines, and clothing sales dropped 3.1% from December, the largest month-over-month decrease in that category since March 2009.

Consumer spending rose at a weak 1.8% annual rate in the fourth quarter of 2019, down from a 3.2% rate in the third quarter, and Friday's report offered few signs that the pace picked up meaningfully in the first month of 2020.

Still, factors driving U.S. consumer spending remain positive. Unemployment was a low 3.6% in January, and average hourly earnings posted a 3.1% year-over-year gain, suggesting households have money to spend.

"The economy is on stable ground," payroll-processing company Automatic Data Processing Inc.'s Chief Executive Carlos Rodriguez said during an earnings call on Jan. 29. Wage growth is "still at robust levels and should drive continued consumer spending and continued consumer confidence," he said.

Some retailers are circumspect about the prospects for 2020. Macy's CEO Jeff Gennette said last week that while the economy is still healthy, he is mindful "that it's not going to be as strong as it was in the two previous years."

On Jan. 15, the U.S. and China signed a trade deal in which the U.S. agreed to cut tariffs on $120 billion in Chinese goods by half, to 7.5%, and to forgo other planned tariffs. But the deal leaves in place U.S. tariffs on about $ 370 billion in Chinese goods, or about three-quarters of Chinese imports to the U.S.

January also saw the first confirmed cases of coronavirus in the U.S., and in late January the U.S. imposed entry restrictions on foreign nationals and quarantines on Americans returning from the Chinese province at the center of the outbreak. While the impact of coronavirus on the U.S. so far has been minimal, a worsening of the outbreak could dent consumer confidence down the line and has already disrupted some U.S. retailers' operations overseas.

Ralph Lauren Corp. temporarily closed around two-thirds of its mainland China stores over the past week due to coronavirus. The fashion house said Thursday it would take a hit in its current quarter of $55 million to $70 million in sales, and $35 million to $45 million in operating income in Asia, due to the outbreak.

"The company also expects broader impact across its businesses in China and parts of Asia due to significantly reduced travel and retail traffic, " Ralph Lauren said.

Write to Harriet Torry at harriet.torry@wsj.com

  (END) Dow Jones Newswires
  02-14-20 1151ET
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