Highlights:
- US personal consumption expenditures (PCE) edged up 0.1% in February, but excluding price effects, the volume of spending (real PCE) fell for a second consecutive month.
- Market expectations were for a slightly stronger increase in both nominal and real spending.
- Upward revisions to real PCE in three of the prior four months take some of the sting out of the disappointing February number.
- Personal incomes rose 0.4% thanks to solid job and wage growth in February.
- PCE inflation rose to 2.1% year-over-year, the fastest pace since 2012. Prices excluding food and energy were 1.8% higher than a year ago, again matching the highest rate since 2012
Our Take:
The disappointing decline in real PCE in February is offset somewhat by upward revisions to previous months, although there is no hiding the fact that spending has slowed early this year relative to the impressive pace recorded through much of 2016. We are now monitoring consumer spending growth of around 1% in Q1, which would trim our GDP forecast for the quarter to 1.7% from 2.0% previously. Some of this slowdown reflects temporary factors, particularly a decline in utilities spending amid mild winter weather, while payback for strong gains in earlier months may also have been at play. It isn’t hard to come up with factors supporting US households -strong job growth and rising wages, rising home prices and equity markets, and the prospect of lower income taxes have all contributed to a pickup in consumer confidence in recent months -so soft consumer spending isn’t expected to last. We look for quarterly gains in the 2½% range going forward, supporting above-trend growth in GDP this year.
For the Fed, today’s PCE report will be a disappointment but we think they too will maintain a constructive view on household spending in the face of Q1’s slowdown. The bigger takeaway from today’s data was arguably firmer PCE inflation, both in the headline and core measures. Progress toward their 2% inflation objective will keep the Fed on their plotted course for gradual rate hikes – we expect another two this year following March’s 25 basis point increase.
