US consumer spending temporarily fall

Consumer spending accounts for more than two-thirds of US economic activity.

30 March 2021 | Economics

Although inflation will move somewhat higher, it will remain well-contained over the next few years. Gus Faucher, Chief Economist: PNC Financial

LUCIA MUTIKANI

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 US$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.

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.

Broad decline

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."- Nampa/Reuters

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