Nominal personal income came in at 0.4%, which matched the expected rate and is now 4.6% higher than a year ago. Real personal disposable income was a little less positive, rising by 0.2%, with the annual growth rate rising to 2.3%. Consumer spending rose by just 0.1%, following 0.2% and 0.6% readings in nominal dollars in January and December, respectively; this was lower than the forecast increase. Real personal spending was 0.1% lower. Spending in the month (in real terms) was driven by decreases in durable goods expenditure (0.1%, largely autos) and spending on services (0.1%). Spending on non-durable goods, was 0.1% higher.
Private sector wages and salaries (roughly 45% of personal income) were up again by a healthy 0.5% in the month (current dollars). Meanwhile, government sector wages and salaries were 0.3% higher; they are now 3.4% higher annually. This annual rate of change is still far below the historical median rate of 6.4% (1960-2016). Private sector wages and salaries increased 5.5% over the last year (historical median was also 1960-2016 = 6.4%). Lastly, the PCE price index and the core price index were up by 0.1% and 0.2%, respectively. The annual change was 2.1% for the core rate and 1.8% for the headline rate (this was the highest headline reading since April 2012).
This was a mixed-to-slightly soft report and the second consecutive decline in real consumer spending portion (even taking into account delayed tax refunds), which will do little to boost the already low expectations for first-quarter GDP (currently 1.4% on the Atlanta Fed’s GDPNow estimate). Hence, while the U.S. consumer (in aggregate) continues to be in relatively good shape with stronger balance sheets, rising incomes, and a 4.8% unemployment rate. Consumers are also being faced with a number of near-term headwinds, which for the most part were not in place last year; these include rising inflation, which is causing the deceleration in real disposable personal income growth; rising interest rates, which we are already seeing reflected in consumers’ behaviour in the mortgage markets; and growth in employment, which is also likely to start to moderate from here as the labor market capacity becomes that much tighter and it becomes more difficult to find qualified workers. What’s interesting—and as we have discussed elsewhere (e.g., Tuesday’s report from the Conference Board)—is how strong consumer confidence has been. What we really need to start to see, therefore, is some follow through on that confidence in terms of actual hard spending. As far as the Fed is concerned, this is still positive news and it is significant that inflation has returned to its target level, this will only further help to support its case for two more rate increases this year.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.