business news
Lucia Mutikani
WASHINGTON (Reuters) – Consumer spending in the U.S. fell further in 10 months in February, when a cold spell hit many parts of the country and the momentum for a second round of stimulus checks for low- and middle-income families eased.
But the drop in consumer spending, the biggest since the mandatory closure of non-essential businesses like restaurants last April to slow the spread of COVID-19, is seen as temporary. The economy is about to record its best performance in 37 years, thanks to the White House’s massive $ 1.9 trillion pandemic relief package and increased coronavirus vaccinations.
“The February retraction in revenue and spending is just a temporary point,” said Gregory Daco, chief economist at Oxford Economics in New York. “We hope that the combination of increasing vaccination rates and a new round of stimulus checks from the largest COVID-19 stimulus package will provide a powerful increase in consumer spending in March.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 1.0% last month amid a broad decline in goods purchases, the Commerce Department said on Friday. This followed a 3.4% recovery in January.
Personal income fell 7.1% after rising 10.1% in January. Economists polled by Reuters had predicted that consumer spending would fall by 0.7% in February and income would fall by 7.3%.
The exceptionally difficult climate in the second half of February, including in Texas and other parts of the densely populated southern region, has reduced home construction, factory production, orders and shipments of manufactured goods.
Temperatures are rising and the aid package approved this month is sending additional checks of $ 1,400 to eligible families and extending the government safety net to the unemployed until September 6. The recovery of the labor market is also gaining momentum, with the first claims for unemployment benefits hitting a year low last week.
The optimistic economic and health prospects have boosted consumers’ spirits, which bodes well for spending. In a separate report on Friday, the University of Michigan said that its consumer confidence index has increased this month to the highest in almost eight years.
Wall Street shares were trading higher. The dollar rose against a basket of other currencies. US Treasury prices were lower.
BROAD DECLINE
Last month, spending on goods fell 3.0%, driven by declines in purchases of pharmaceutical and recreational products. Spending on services increased 0.1%, as consumers spent more on public services and health care in hospitals, offsetting a decrease in spending on restaurants.
With weak demand, inflation fell. But prices are expected to accelerate due to the broader reopening of the economy and the drop in weak readings from last year’s calculation, as well as very accommodative fiscal and monetary policy.
Federal Reserve Chairman Jerome Powell told lawmakers this week that the expected increase in inflation over the year will be “neither particularly large nor persistent”.
The price index for personal consumption expenses (PCE), excluding the volatile component of food and energy, gained 0.1%, after rising 0.2% in January. In the 12-month period up to February, the so-called PCE price index rose 1.4%, after rising 1.5% in January. The core of the PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.
“Although inflation will rise somewhat, it will remain well contained for years to come,” 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 fell 1.2% last month, after jumping 3.0% in January. Despite the drop in so-called real consumption expenditures, consumption in the first two months of the first quarter is well above the average for the fourth quarter.
A 2.5% increase in the trade deficit in goods to $ 86.7 billion in February, the second largest on record, reported by the Department of Commerce in another report on Friday, did nothing to dampen enthusiasm about the economic growth this quarter.
The report also showed wholesale inventories gaining 0.5% last month and retail inventories unchanged.
With the latest data in hand, economists at Morgan Stanley have increased their estimate of gross domestic product for the first quarter to an annualized rate of 10.0% from an 8.7% pace. The economy grew 4.3% in the fourth quarter. Growth this year could reach 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, the worst performance in 74 years.
Last month’s revenue was reduced by a 27.4% drop in government transfers. Wages were also low. The savings rate fell to 13.6%, still high, from 19.8% in January, with economists hoping that part of the money from the latest stimulus checks will be saved. Families have about US $ 1.9 trillion in surplus savings.
“We anticipate that this treasure will exceed $ 2 trillion once the last round of direct checks reaches family income in March and April,” said Tim Quinlan, senior economist at Wells Fargo Securities in Charlotte, North Carolina. “This will provide families with ample means to boost spending, not only with the reopening of the economy this year, but also next year.”