- Personal income declined by 7.1% month-on-month in February, a tick deeper than the 7.0% decrease expected by the consensus. Wages and salaries were flat on the month after nine consecutive months of positive growth.
- Subtracting price changes and taxes, real disposable income fell by 8.2% on the month.
- Spending was down by 1.0% month-on-month, disappointing market expectations by two tenths of a percentage point. Goods spending declined by 3%, but services edged up by 0.1%. The decline in goods spending was broad-based with other nondurable goods driving the drop. In services, gains were led by housing and utilities and health care. Both goods and services spending were revised up in January.
- The personal saving rate declined to 13.6% from 20.5% in January, but remains well above the historical average of roughly 7%.
- The overall PCE price deflator rose by 0.2% m/m in February, softer than 0.3% m/m expected by the market. Year-on-year the price index was up 1.6%. After removing energy and food prices, the core PCE deflator rose by 0.1% m/m and 1.4% y/y.
Key Implications
- After falling retail sales reported earlier in the month, the downswing in spending was more or less priced into the consensus estimate. The weakness is a reflection of unusually severe weather rather than stringent lockdowns or consumer caution. Indeed, according to high frequency data, the number of visitors to places of retail and recreation pulled back in February even as restrictions eased and the number of new virus cases dropped.
- February’s slide in personal income comes following the $160 billion hump in government income support in January, making the month-on-month comparison somewhat of a red herring. Relative to last year, personal income is still up by 4.3%. Moreover, American households’ financial resilience, as measured by the $1 trillion in excess savings, remains solid and is getting reinforced by additional $400 billion in relief payments and $200 billion in unemployment provisions of the American Rescue Plan.
- Consumers fundamentals are fertile ground for a spending bloom provided that the economy continues to open up. Google mobility trends already point to an accelerating rebound, strengthening to levels above those observed in the summer of 2020. Meanwhile, president Biden’s more ambitious vaccination plan of 200 million of doses, should lead to at least 40% of the population having been partially inoculated by the end of April, which may pull forward the timing of broad reopening. In line with that, we expect real spending growth to accelerate from 4.7% (annualized) in the first quarter to 6.6%(annualized) in the second quarter of 2021.
