Domestic demand has been showing increasing strength in the U.S., as consumer spending rose at a healthy pace over the last two months, but the manufacturing sector is tempering this good news and causing some worry as it is not reflecting the same positive recovery and instead showing sustained weakness.
Fed’s Rate Rise More Likely
The ongoing increase in domestic consumer spending could be the factor that strengthens the case for a rise in interest rates by the Federal Reserve as it enters the second day of its deliberations. While the data on the weakness in manufacturing could negate the effect, most economists agree that it will, most likely, not have an impact on the decision expected from the Fed by the end of this week.
The rate which has been near zero since the December 2008 will be reconsidered amidst the setting of a tightening U.S. labor market, slowing global growth, and low inflation, but analysts are predicting that other conditions will cause the Fed to conclude it is the right time to move.
Increase in Retail Sales
One of the key areas is the rise in retail sales. According to the Commerce Department, sales increased 0.6 percent in July and 0.4 percent in August, when food services, building materials, automobiles, and gasoline are excluded. These figures closely follow the consumer spending element of GDP and represent the latest signs of strong economic momentum while also suggesting that the recent stock market volatility had very little direct effect on household spending in the U.S.
In contrast to this news, the factory data did not fare as. Although manufacturing output rose by 0.9 percent in July, it promptly fell again by 0.5 percent in August, with auto production particularly hard hit with a 6.4 percent drop. However, this fall should be taken in context as it is probably caused by the annual summer plant retooling shutdowns ahead of increased demand towards the end of the year. How the Fed will react to all this new data? Well the markets are still on tender hooks awaiting its decision.