By Ben Leubsdorf
Stronger consumer spending, rising factory production and firming inflation are pointing to solid momentum for the U.S. economy and another interest-rate increase by the Federal Reserve, potentially as soon as next month.
The Commerce Department on Wednesday reported stronger-than-expected growth in retail sales in January, while the Labor Department said a gauge of U.S. inflation rose to its highest annual level in nearly five years and the Fed reported factory output increased last month.
For several months now, gauges of investor, business and household sentiment have been trending higher. The latest reports suggested real economic activity remains on track but hasn't yet broken out strongly to the upside.
Together with Fed Chairwoman Janet Yellen's statement this week that the central bank may raise rates "at our upcoming meetings," the latest indicators boosted the odds of a rate increase in mid-March. Futures tracked by CME Group on Wednesday signaled a roughly 1-in-4 chance of a Fed move at next month's policy meeting, double the probability before Ms. Yellen's congressional testimony on Tuesday.
Action also could come at the Fed's meeting in early May. J.P. Morgan Chase economists said Wednesday's data convinced them a move was likely then, after they earlier predicted the Fed would wait until June.
The stock market jumped following the Nov. 8 presidential election, along with surveys of consumer confidence and business sentiment, raising hopes for a pickup in overall economic growth.
Still some forecasters are cautious as they await details on the tax, trade and other policies that will be pursued by President Donald Trump and congressional Republicans.
"What really matters are the fundamentals: jobs, income, that sort of thing," said Gus Faucher, deputy chief economist at PNC Financial Services Group. Rising sentiment in anticipation of tax cuts and other policy shifts "may provide a little bit of a boost," he said, but "it needs to be pretty apparent that we're going to get these policies to have a really sustained impact on growth."
Hard data on economic activity signal overall growth remains healthy but unspectacular in early 2017. Forecasting firm Macroeconomic Advisers on Wednesday projected first-quarter gross-domestic-product growth at a 2.0% pace, and the Federal Reserve Bank of Atlanta's GDPNow model estimated GDP growth at 2.2% in the first quarter. In the fourth quarter, GDP grew at a 1.9% annual rate, near its average since the recession ended in mid-2009.
Ace Hardware Corp. Chief Executive John Venhuizen said he anticipated "solid and steady" momentum in consumer spending, despite weak sales at his chain last month that he attributed to warm weather curbing demand for salt, shovels and other winter gear across the Midwest and Northeast.
He said he hopes for a pickup in U.S. economic growth, but he is not expecting one just because there is chatter about tax cuts and regulatory reform under the Trump administration. "Talk is cheap," Mr. Venhuizen said.
The Commerce Department on Wednesday reported that sales at U.S. retail stores and restaurants increased 0.4% in January from the prior month, with spending steady or up in most categories outside a pullback in automotive purchases. Excluding both autos and gasoline, retail sales were up 0.7% last month, which was the strongest reading since last April.
Total retail sales in January rose 5.6% from a year earlier. The data were adjusted for seasonal variations but not inflation, so some of the increase in sales reflected rising prices.
The consumer-price index, a broad measure of what Americans pay for everything from seafood to shelter, increased a seasonally adjusted 0.6% in January from a month earlier, the Labor Department said Wednesday. That was the biggest gain since February 2013, boosted by rising prices for gasoline.
From a year earlier, overall prices rose 2.5% in January, the largest 12-month increase since March 2012. Prices were up 2.3% on the year when excluding food and energy.
Inflation has been subdued for years amid lackluster economic growth and a stretch of low energy prices. That era may be coming to an end as unemployment falls, demand picks up and oil prices stabilize.
The Fed targets 2% annual inflation but favors the Commerce Department's personal-consumption-expenditures price index, which rose 1.6% in December from a year earlier.
Meanwhile, the Fed on Wednesday reported that industrial production -- a measure of output at American factories, mines and utilities -- declined 0.3% in January from a month earlier. Unseasonably warm temperatures cooled demand for utilities, but underlying figures showed modest progress for the manufacturing sector.
Factory output, the biggest component of industrial production, rose 0.2% in January. Output for motor vehicles and parts fell but production increased for most other categories including machinery, textiles and petroleum and coal products.
The mining index, which includes oil and natural-gas extraction, was up 0.4% from a year earlier last month. The annual increase is significant because the sector had dragged on economic growth in recent years.
"The turnaround in mining is real," Mr. Faucher said. "That's due to higher prices for commodities, and that is spilling over into manufacturing."
--Jeffrey Sparshott and Eric Morath contributed to this article.
Write to Ben Leubsdorf at email@example.com
(END) Dow Jones Newswires
February 15, 2017 14:19 ET (19:19 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.