US: Soft Spending in February Spells Another Weak Start to the Year

US: Soft Spending in February Spells Another Weak Start to the Year

As expected, personal income rose 0.4% in February. Disposable income posted a matching gain of 0.4% on the month, and when adjusted for inflation, real disposable income was up a more modest 0.2%.

Personal spending was also in line with expectations, rising 0.2% in nominal terms. In real (inflation-adjusted) terms however, spending was flat. Real spending in January was also revised down.

By component, real spending on durable goods recovered part of January’s 1.6% decline, up 0.6%. Non-durable goods spending declined (-0.3%) for the third month in a row, following a period of strength at the end of 2017. Services spending was flat in real terms.

Prices rose 0.2% month-on-month in February, lifting headline inflation a tick to 1.8%. Core prices also firmed, rising 0.2% (m/m) in February, taking core inflation up slightly to 1.6% year-on-year.

The personal saving rate rose slightly to 3.4% in February, as it recovers from very low levels at the end of last year. The saving rate remains below its five year average of 5%.

Key Implications

Just as it did in 2016 and 2017, consumer spending started the year on a soft note. Even a strong showing for consumer spending in March won’t be enough to save the first quarter, where consumer spending growth is tracking not much above 1% growth in real terms. Some of the spending weakness is simply give back following hurricane-induced buying late in 2017. But, it is difficult not to notice the apparent seasonal pattern even in the “seasonally adjusted data”; a weak first quarter is followed by strength through the remainder of the year.

The weakness to start the year is likely to imply a one-handle for real GDP too, notably weaker than in our recent forecast. Still, we are not concerned with the apparent setback, which should prove to be short lived if history is any guide. With both tax cuts and a tightening labor market likely to push up income, household demand is expected to accelerate enough to pull growth to a well above-trend rate over the remainder of 2018.

The encouraging part of this report is on the inflation front. Momentum has picked up in recent months, and the annualized three-month moving average core inflation rate currently sits at 2.3%. There is cause to fade some of this strength – the residual seasonality in the real spending data is the flip side of seasonality on the inflation front, where price growth appears understated at the end of the calendar year and overstated in January. Short-term gyrations aside, inflation is at a turning point. We expect that upward momentum in inflation will continue over the medium term, underpinning further rate hikes by the Federal Reserve.

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