Personal disposable incomes rose 0.3% after adjusted for inflation in February. Consumer spending rose 0.2% after adjusting for inflation. The real news, however, was in downward revisions to January, which will deal a blow to real GDP growth in the first quarter. We are now looking at an economy growing in the 1% range in the first quarter instead of the 2% that the Federal Reserve had hoped earlier in the year.
The saving rate picked up slightly, but not enough to get excited about. The saving rate hasn’t moved very much over the last year, and appears to be hitting a new post crisis plateau. It is unclear whether this is because consumers have become much more conservative than they were in the past or simply because their access to credit is not what it once was. Much of the sharp downdraft in saving that we saw prior to the crisis was driven by a surge in home equity lines of credit, which allow people to tap the equity in their homes to spend when their incomes fell short.
Separately, the PCE index, which more accurately tracks inflation more than the CPI, edged down 0.1% in February. Declines were in everything from energy to goods prices. The only offset was services, which edged up by 0.1%. Year-over-year measures of PCE came in at 1%, or half the Federal Reserve’s current target for inflation. More importantly, core PCE which is a better predictor of what inflation will be down the road, held to the 1.7% pace of increase from year ago that we saw in February. This is a little close to the target for Hawks on the Federal Reserve. Chair Yellen, however, is likely to reiterate her desire to see wages accelerate more consistently before pulling the trigger again on rate hikes. The bet for a June over an April rate hike still holds.
Bottom Line: Today’s consumer spending affirms recent revisions to retail sales, which were to the downside, and suggests that economic growth remains tepid. We have concerns about the accuracy of our GDP statistics, which have suffered from Congressional budget cuts in recent years. That said, the anger we are seeing at the polls is inescapable, and provides validation to Chair Yellen that labor markets are still a long way from fully healing. Look for her to continue to hold Hawks at bay in April, and wait for a more persistent acceleration in wages before lifting rates again in June.