Weak income, soft real spending, and downward GDP revisions signal slowing U.S. economic momentum, while persistent inflation keeps pressure on the Federal Reserve.
The U.S. economy showed strains in February even before the Middle East conflict due to anemic growth in income and real spending, according to two separate reports released Thursday by the Bureau of Economic Analysis (BEA). Economists fear a further loss in economic momentum in the near term amid the uncertainties.
Income Subdued, Inflation Evident: Personal income edged down 0.1% month over month (M-o-M) in February, slower than the 0.4% rise in January and the consensus estimate of 0.3% growth.
The slowdown reflected decreases in personal dividend income and personal current transfer receipts, with the latter category referring to money received through government benefits, Medicare & Medicaid payments, veterans’ benefits, student grants and other payouts. The January number received a boost from tax cuts.
The disposable personal income, which is personal income less current taxes, fell 0.1%.
On the other hand, personal consumption expenditure (PCE) climbed 0.5% versus the 0.6% rate estimated by economists but faster than January’s 0.3% rate. The real PCE, which is adjusted for inflation, was up merely 0.1% following no growth in January.
The personal savings rate as a percentage of disposable personal income was 4%.
US Personal Savings Rate
Source: St. Louis Fed
The data pertains to the period before the onset of the conflict in the Middle East involving the U.S. and Iran. The resultant blockade of the Strait of Hormuz, a key chokepoint, sent energy prices soaring higher. The more than a month-old war was stalled temporarily following a two-week ceasefire deal, although both sides have accused each other of not keeping their end of the bargain.
The inflation components of the BEA's, namely the monthly PCE index rose 0.4%, in line with the consensus estimate but slightly faster than January’s 0.3% increase. The annual rate of the PCE index remained unchanged at 2.8%, aligning with the average economists’ estimate. The PCE index is referred to as the Fed’s prefrred inflation gauge which the central bank considers while formulating monetary policy.
The M-o-M change in the core PCE index remained steady at 0.4% and the annual rate ticked down 0.1 points to 3%. Both were in line with expectations.
Annual PCE Rate
Source: BEA
The Bureau of Labor Statistics (BLS) is scheduled to release its March consumer price inflation (CPI) report on Friday.
Commenting on the February report, Renaissance Macro Research said, “Real incomes net of transfers have declined for two of the last three months. Given the weak income growth in March and sharp increase in consumer prices, it’s quite likely that real incomes will fall in March.”
GDP Revised Down Yet Again: BEA’s revised fourth-quarter GDP data showed that the U.S. economic growth was revised down by 0.2 percentage point to 0.5%. This represented a marked deceleration from third quarter’s 4.4% growth. Economists had braced for the quarterly GDP growth to be left unchanged at 0.7%.
The downward revision from the second estimate was primarily due to a cut to the investment estimate.
Contributions to GDP Percentage Change
Source: BEA
Among the price indices, the gross domestic purchases (GDP) price index climbed 3.7%. The annual rates of change of the PCE and core PCE price indices were at 2.9% and 2.7%, respectively.
Commenting on the twin reports, LPL Chief Economist Jeffrey Roach said even before the war, inflation pressures were especially acute in health care and financial services. “We are a long way off from material improvement,” he added.
“Looking ahead, expect super core inflation to remain above 3%, growth to slow to 2%, and a subset of the corporate sector to support the economy amid the geopolitical ambiguity.” Super core inflation excludes housing and shelter costs as well as food and energy.
Read Next: US Jobless Claims Surprise to Upside but Continuing Claims Fall, Clouding Fed Rate Outlook