Personal income was up 0.5% month-on-month (m/m) in February, on par with consensus expectation. January growth was revised up to +0.4% m/m from a flat reading. Compensation of employees (+0.6% m/m) remains the driving force of higher income, with both private and government sector wages rising.
Removing the effect of price changes and taxes, real personal disposable income declined for the third month in a row, down by 0.2% m/m in February, while January’s decline was revised down to up to -0.2% m/m (from -0.3% reported earlier).
Nominal personal spending rose by 0.2% m/m in February, below the consensus estimate (0.5% m/m). January growth of 2.1% m/m reported in the preliminary estimate was revised up to 2.7% m/m.
- Goods spending fell 1.0% m/m from upwardly revised growth of 6.5% in January (originally +5.2%). Both durables (-2.5%m/m) and nondurables (-0.1% m/m) spending were down, with the major drag coming from lower spending on motor vehicles and parts.
- Services spending rose by 0.9% m/m, while the January reading was adjusted up to 0.7% m/m (originally +0.5%). The gain was largely attributed to spending food services and accommodation.
In real terms, spending was down 0.4%, slightly weaker than expected by the market (-0.2% m/m). Real goods spending was behind the drag with a decline of 2.1%. Real services spending was up 0.6%.
The PCE price deflator rose by 0.6% m/m in February (as expected), which translated into 6.4% in year-over-year (y/y) terms (as expected). Excluding food and energy, core PCE inflation was up 0.4% m/m (as expected) and 5.4% y/y (vs. 5.5% expected).
The personal saving rate was up to 6.3% from 6.1% in January.
Key Implications
February of exactly two years ago marks the “pre-pandemic” benchmark against which economists have been measuring the COVID-induced economic shock and recovery. Relative to it, real consumption is now 4.6% higher, with goods spending 15.6% higher and services spending, which are still suffering from the effects of restrictions, 0.3% lower.
In an ideal world, consumers will shift spending back to services, contributing to lower goods price pressure while keeping the economy going. Today’s release shows some evidence of this reversion, which should build momentum in the coming months. Accounting for upward revisions, we expect real spending growth to be stronger than the 2.4% penciled into our forecast.
Higher prices continue to erode consumer purchasing power, with real disposable income growth declining for the seventh month in a row. Consumers have been able to buy more than they earn with substantial excess saving, which we currently estimate at $2.5 trillion. (down from a peak of almost $2.7 trillion in September 2021). With the current reading of the Fed’s preferred measure of inflation (the core PCE price deflator) well above target, the risk higher inflation becoming entrenched is becoming more real (see Dollars & Sense).
