Skip to main content

U.S. consumer spending rose marginally for a second-straight month in February as households boosted savings, the latest indication that the economy lost momentum in the first quarter.

But the economy’s fundamentals remain strong, with other data on Thursday showing the number of Americans filing for unemployment benefits dropping to more than a 45-year low last week. A tightening labour market is expected to start driving up wages by the second half of this year.

Consumer spending has been tepid this year despite strong consumer confidence, which has been bolstered by income-tax cuts. Some economists said the tax cuts, which came into effect in January, only reflected on most workers’ paycheques in late February. They also believed that delays in processing tax refunds had contributed to holding back spending.

“The outlook for spending on discretionary categories is obviously more uncertain, though there are some plausible reasons to expect better consumption outcomes ahead,” said Michael Feroli, an economist at JPMorgan in New York.

“Relative to years past, tax refunds were paid out slower at the start of this year.”

The U.S. Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2 per cent last month after a similar gain in January. It was supported by a rebound in spending on long-lasting goods, such as motor vehicles, as was a rise in financial services and insurance expenditures.

The increase in consumer spending in February was in line with economists’ expectations.

There was also a moderation in monthly inflation readings after prices pushed higher in January. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2 per cent last month after advancing 0.3 per cent in January.

That lifted the year-on-year increase in the so-called core PCE price index to 1.6 per cent, the biggest gain since February, 2017, from 1.5 per cent in January. The core PCE index is the U.S. Federal Reserve’s preferred inflation measure. It has been below the U.S. central banking system’s 2-per-cent target since mid-2012.

Economists believe the annual core PCE price index could accelerate to 1.9 per cent in March as last year’s weak readings drop out of the calculation. The Fed raised interest rates last week and forecast at least two more rate hikes this year.

“Policy makers can be confident about the inflation outlook and will likely keep with the plan to raise rates a couple more times this year,” said Chris Rupkey, chief economist at MUFG in New York. “Inflation is not heating up, but pressures are building.”

The dollar was little changed against a basket of currencies while stocks on Wall Street were trading higher. Prices of U.S. government bonds rose.

The steady rise in inflation last month also helped curb consumer spending. When adjusted for inflation, consumer spending was unchanged in February after falling 0.2 per cent in the prior month. That suggests a sharp slowdown in consumer spending in the first quarter after it surged at an eye-popping 4-per-cent annualized rate in the fourth quarter.

The tepid consumer spending added to data on trade, housing and business spending on equipment that have left economists anticipating moderate economic growth in the first quarter.

Data forecasting firm Macroeconomic Advisers cut its first-quarter GDP growth estimate by three-10ths of a percentage point to a 1.5-per-cent rate. Economists at Barclays lowered their forecast to a 1.7-per-cent rate from 1.8 per cent. The economy grew at a 2.9-per-cent pace in the fourth quarter.

In February, personal income rose 0.4 per cent, matching the increase of the previous two months. Wages increased 0.5 per cent last month after climbing 0.6 per cent in January.

Savings increased to US$497.4-billion in February, the highest level since August, 2017, from US$471.3-billion in the prior month. That lifted the saving rate to a six-month high of 3.4 per cent from 3.2 per cent in January.

Income growth could pick up as the labour market tightens further, which should help to support consumer spending.

In a separate report on Thursday, the U.S. Labour Department said initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 215,000 for the week ended March 24, the lowest level since January, 1973.

The labour market is considered to be near or at full employment. The jobless rate is at a 17-year low of 4.1 per cent, not too far from the Fed’s forecast of 3.8 per cent by the end of this year. “These data continue to flash further tightening in labour-market conditions with firms unwilling to fire existing workers, presumably because of the difficulty of finding replacements,” said John Ryding, chief economist at RDQ Economics in New York.

Reuters

Interact with The Globe