A new report from the Department of Commerce showed that personal income for Americans rose by 0.4 percent in February, in line with expectations, and the January gain was revised higher. Over the past twelve months, personal income has lifted by 4.6 percent, the strongest reading on annual growth since May 2015. However, personal consumption expenditures (PCE), i.e. consumer spending, rose by just 0.1 percent in February, less than forecast and the smallest monthly gain since March of last year. Even worse is that after adjusting for price changes, consumer spending actually fell by 0.1 percent in February, the second monthly decline in a row and enough to pull down annual growth to the lowest level since August.
Speaking of inflation, the PCE price indices included in this report, the Federal Reserve’s preferred measures of consumer price changes, both climbed in February, with the headline index rising above policymakers’ 2.0 percent “target” for the first time since April 2012. Although building inflation pressures will help officials at the Federal Reserve justify additional interest rate hikes in 2017, the recent weakness seen in consumer spending is a bit concerning. In fact, analysts at Goldman Sachs immediately after the release of this report slashed their first quarter gross domestic product (GDP) growth forecast from 1.8 percent to 1.5 percent, and the Federal Reserve Bank of Atlanta cut its projection to just 0.9 percent. The latest spending slowdown could be temporary, though, related to an unusually warm winter (smaller outlays for household utilities) and a tax refund delay. Subsequent reports on personal consumption will therefore be needed to shed more light on both the current state of the economic expansion in America, as well as the future path of monetary policy.
Sources: Econoday, Bloomberg, Twitter, U.S. Census Bureau, FRBSLPost author: Charles Couch