U.S. private jobs, consumer spending data support Fed rate hike

November 30, 2016 8:41 AM EST

People shop at The Grove mall in Los Angeles November 26, 2013. REUTERS/Lucy Nicholson


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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. private employers stepped up hiring in November and consumer spending increased last month, the latest signs of economic strength that could further cement the case for an interest rate hike from the Federal Reserve next month.

The data on Wednesday also showed income rising solidly and savings climbing to a seven-month high in October, positioning households to boost spending in the future.

"There is nothing in today's reports that put a roadblock in front of a Fed rate hike in December. The economy continues to move ahead powered by the American consumer who has got the income to both spend and save for a rainy day," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The ADP National Employment Report showed that private payrolls increased by 216,000 jobs this month, well above economists' expectations for a gain of 165,000 jobs. The report is jointly developed with Moody's Analytics.

The ADP figures come ahead of the Labor Department's more comprehensive employment report on Friday, which includes both public and private sector payrolls. Economists polled by Reuters are looking for nonfarm employment to have risen by 175,000 jobs in November after increasing by 161,000 jobs in October.

In a separate report, the Commerce Department said consumer spending, which accounts for about 70 percent of U.S. economic activity, increased 0.3 percent after an upwardly revised 0.7 percent gain in September. Spending in September was previously reported to have risen 0.5 percent.

A third report showing a marginal increase in contracts to buy previously owned homes last month, however, put a wrinkle in an otherwise brightening economic outlook.

The consumer spending and private hiring reports added to data on residential construction, home sales, inflation and manufacturing that have suggested the economy sustained its momentum early in the fourth quarter after growing at its quickest pace in two years in the July-September period.

The government reported on Tuesday that gross domestic product increased at a 3.2 percent annual rate in the third quarter, driven by strong consumer spending and a surge in soybean exports.

A strengthening economy, together with a labor market that is near full employment could make the Fed comfortable to hike rates at its Dec. 13-14 policy meeting. The U.S. central bank raised its overnight benchmark interest rate last December for the first time in nearly a decade.

The dollar <.DXY> was trading higher against a basket of currencies, while prices for U.S. government bonds fell. Stocks on Wall Street generally rose, with both the Dow Jones industrial average <.DJI> and the S&P 500 index <.SPX> hitting record intraday highs.

INFLATION GAINING

Consumer spending could get further support next year if U.S. President-elect Donald Trump's proposals to cut taxes and boost spending are approved by Congress.

With consumer spending firming, inflation continued to gain in October. The personal consumption expenditures (PCE) price index rose 0.2 percent after similar increases in both August and September. In the 12 months through October the PCE price index rose 1.4 percent, the biggest advance since October 2014, after increasing 1.2 percent in September.

Excluding food and energy, the so-called core PCE price index gained 0.1 percent after rising by the same margin in September. That left the year-on-year increase in the core PCE at 1.7 percent in October. The core PCE has increased by that same margin for three straight months.

The core PCE is the Fed's preferred inflation measure and is running below its 2 percent target.

"The bottoming out in energy prices earlier this year has contributed to stronger overall inflation," said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.

"Inflation will continue to pick up over the next couple of years. Stronger wage growth as the labor market continues to tighten will lead firms to raise prices, as will the pass-through of higher energy prices throughout the broader economy."

The sustained uptick in price pressures, however, curbed the gain in inflation-adjusted consumer spending, which increased 0.1 percent last month after rising 0.5 percent in September. That suggests some moderation in consumer spending this quarter from the third quarter's solid 2.8 percent pace.

Overall consumer spending in October was supported by a 1.0 percent increase in purchases of long-lasting manufactured goods such as automobiles. Spending on services fell 0.2 percent.

Personal income rose 0.6 percent last month after increasing 0.4 percent in September. Wages and salaries advanced 0.5 percent for a second straight month.

Savings increased to $860.2 billion, the highest level since March of this year, from $814.1 billion in September.

(Reporting by Lucia Mutikani; Additional reporting by Dan Burns and David Lawder; Editing by Paul Simao)



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