US consumer spending falls ahead of stimulus
- 27 Mar 2021
US consumer spending fell by the most in 10 months in February as a cold snap gripped many parts of the country and the boost from a second round of stimulus checks to middle- and lower-income households faded.
But the drop in consumer spending, the biggest since mandatory shutdowns of nonessential businesses like restaurants last April to slow the spread of COVID-19, is seen as temporary. The economy is poised to log its best performance in 37 years, thanks to the White House’s massive $1.9 trillion pandemic relief package and increased vaccinations against the coronavirus.
“The February pullback in income and spending is only a temporary blip,” said Gregory Daco, chief US economist at Oxford Economics in New York. “We expect the combination of rising vaccination rates and a new round of stimulus checks from the largest COVID-19 stimulus package yet will provide a powerful lift to consumer spending in March.” Consumer spending, which accounts for more than two-thirds of US economic activity, dropped 1.0% last month amid a broad decline in purchases of goods, the Commerce Department said on Friday. That followed a 3.4% rebound in January.
Personal income tumbled 7.1% after surging 10.1% in January. Economists polled by Reuters had forecast consumer spending would decrease 0.7% in February and income would decline 7.3%.
Unusually harsh weather in the second half of February, including in Texas and other parts of the densely populated South region, depressed homebuilding, production at factories, orders and shipments of manufactured goods.
Temperatures are rising and the relief package approved this month is sending additional $1,400 checks to qualified households and extending the government safety net for the unemployed through Sept. 6. The labour market recovery is also gaining traction, with first-time applications for unemployed benefits hitting a one-year low last week.
The brightening health and economic outlook boosted consumers’ spirits, which bodes well for spending. In a separate report on Friday, the University of Michigan said its consumer sentiment index increased this month by the most in nearly eight years.
Stocks on Wall Street were trading higher. The dollar rose against a basket of other currencies. US Treasury prices were lower.
Last month, spending on goods dropped 3.0%, led by declines in purchases of pharmaceutical products and recreational items. Spending on services edged up 0.1% as consumers spent more on utilities and health care at hospitals, offsetting a decrease in outlays at restaurants.
With demand soft, inflation retreated. But prices are expected to accelerate owing to the broader re-opening of the economy and the dropping of last year’s weak readings from the calculation, as well as very accommodative fiscal and monetary policy.
Federal Reserve Chair Jerome Powell told lawmakers this week that the anticipated rise in inflation over the course of the year will be “neither particularly large nor persistent.” The personal consumption expenditures (PCE) price index excluding the volatile food and energy component gained 0.1% after rising 0.2% in January. In the 12 months through February, the so-called core PCE price index climbed 1.4% after increasing 1.5% in January. The core PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.
“Although inflation will move somewhat higher, it will remain well-contained over the next few years,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “There is still a lot of slack in the economy.” When adjusted for inflation, consumer spending decreased 1.2% last month after jumping 3.0% in January. Despite the drop in so-called real consumer spending, consumption in the first two months of the first quarter is running well above the fourth quarter average.
A 2.5% increase in the goods trade deficit to $86.7 billion in February, the second highest on record, reported by the Commerce Department in another report on Friday, did nothing to dampen enthusiasm about economic growth this quarter.
The report also showed wholesale inventories gaining 0.5% last month and stocks at retailers unchanged.
With latest data in hand, economists at Morgan Stanley raised their first-quarter gross domestic product estimate to a 10.0% annualized rate from a 8.7% pace. The economy grew at a 4.3% pace in the fourth quarter. Growth this year could top 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, the worst performance in 74 years. Income last month was depressed by a 27.4% plunge in government transfers. Wages were also flat. The saving rate fell to a still-high 13.6% from 19.8% in January, with economists expecting some of the cash from the latest stimulus checks will be saved. Households are sitting on about $1.9 trillion in excess savings.
Reuters
