Consumer Spending Drops in October, but Fed Rate Hike Still Likely
Consumers scaled back spending in October, but the Federal Reserve is still likely to raise interest rates in December.
"I think this is just the consumer taking a pause," said JPMorgan Asset Management global markets strategist David Lebovitz, who is based in New York. "If you look at the year-over-year numbers, we're still seeing very strong growth in auto sales and spending at restaurants, so we are seeing that consumer story continue to play out."
Retail sales rose 0.1% in October, missing estimates of 0.3%. Lebovitz said the slowdown is attributed to consumers gearing up for the busy holiday shopping season, which officially begins at the end of this month. The lackluster retail sales numbers end a tough week for the retail industry. Days ago, Macy's (M) - Get Report said its same-store sales fell 3.6% during the third quarter. The company lowered its 2015 profit guidance.
Lebovitz still thinks the Fed will move interest rates off of crisis-era levels when it holds its next two-day policy meeting in December.
Still, Lebovitz said plenty could happen over the next month that could derail that forecast, including a disappointing November jobs report, which will be released in early December.
"Let's not forget, although the October employment numbers were very good, August and September were pretty disappointing," he said.
Like the markets, Lebovitz is looking at a 70% to 75% chance the Fed moves rates higher in December.
Plus, St. Louis Fed president James Bullard spoke at a conference in Washington, D.C., on Thursday and repeated his call for the Fed to move on interest rates. Bullard, who is well known as a hawk, has an eye on the December meeting.
"We see inflation gradually rising to about 2% in March 2016," Lebovitz said. "Monetary policy operates with a six to nine month lag, which means if they raise rates today, it doesn't really hit the economy until six to nine months from now."
With forecasts of higher inflation and with the economy hitting full employment (5% unemployment) and showing relatively robust job creation, Lebovitz thinks it's a good time for the Fed to move.