In (another) mixed release, the BEA reported a 0.2% gain in personal income in February, and a 0.1% gain in personal spending in January. Both came in below expectations for a 0.3% gain on both metrics. The tepid gain in January’s spending came as income pulled back 0.1% in that month.
Falling prices (-0.1%) were partly responsible for the soft growth in nominal spending. On a year-on-year basis, inflation in the PCE deflator decelerated to 1.4% in January (from 1.8%) in December. Core PCE inflation also edged lower to 1.8% from an upwardly revised 2.0% in December.
In real terms, spending was up 0.1% to one decimal place. By major category, real durable goods spending fell 1.6% (falling for a second straight month), nondurable goods were up 0.5%, while services rose 0.2%.
The personal saving rate fell to 7.5% in February from an upwardly revised 7.7% in January.
Key Implications
It’s more backward looking than normal, and still distorted by the government shutdown, but the soft pace of consumer spending suggests another slow start to the year. Even with solid rebounds in February and March, real consumption growth is likely to come in between 0.5 and 1.0% (annualized) in the first quarter.
The income side of things paints a slightly better picture. While the gain in February was modest, the average over the past three months sits at 4.5% (annualized) to February. A relatively high saving rate (up over a percentage point since late last year) suggests considerable scope for spending to bounce back in the months ahead.
Prospects for continued growth hinge on the continued health of the job market. A rebound in job growth in March following the soft outturn in February would go a long way to easing fears that the American economic engine is sputtering.
