WASHINGTON (Reuters) – US consumer spending fell sharply in the last 10 months of February, as a cold snap swept through many parts of the country and increased second-round stimulus checks on middle-income households and small disappeared.
But the decline in consumer spending, the largest since the mandatory closure of non-essential businesses, such as restaurants in April last year, to slow the spread of COVID-19, is seen as temporary. The economy is poised to perform at its best in 37 years, thanks to the White House’s massive $ 1.9 trillion pandemic aid package and increased coronavirus vaccinations.
“The February withdrawal of revenue and spending is only a temporary moment,” said Gregory Daco, chief economist at Oxford Economics in New York. “We expect the combination of rising vaccination rates and a new round of incentive checks from the largest COVID-19 incentive package to deliver strong growth in consumer spending in March.”
Consumer spending, which accounts for more than two-thirds of US economic activity, fell 1.0 percent last month amid a sharp drop in purchases of goods, the Commerce Department said Friday. This followed a 3.4% return in January.
Personal income fell 7.1% after rising 10.1% in January. Economists surveyed by Reuters forecast that consumer spending will fall by 0.7% in February and revenues will fall by 7.3%.
Unusually harsh weather in the second half of February, including Texas and other parts of the densely populated southern region, depressed home construction, factory production, orders and shipments of manufactured goods.
Temperatures are rising, and the aid package approved this month is sending an additional $ 1,400 to qualified households and extending the government’s safety net to the unemployed until September 6. The recovery of the labor market is also gaining more and more, with first-time applications for unemployment benefits a minimum of one year last week.
Bright health and economic prospects have stimulated consumer spirits, which bodes well for spending. In a separate report Friday, the University of Michigan said its consumer sentiment index has risen this month by the most in nearly eight years.
Shares on Wall Street traded more. The dollar has risen against a basket of other currencies. US Treasury prices were lower.
GREAT DECIDES
Last month, spending on goods fell by 3.0%, due to lower purchases of pharmaceuticals and leisure items. Expenditure on services increased by 0.1% as consumers spent more on utilities and hospital care, offsetting a decrease in restaurant spending.
As demand fell, inflation retreated. But prices are expected to accelerate due to a wider reopening of the economy and a drop in last year’s poor reading from the calculation, as well as a very accommodative fiscal and monetary policy.
Federal Reserve Chairman Jerome Powell told lawmakers this week that the anticipated rise in inflation during the year will be “neither particularly high nor persistent.”
The Consumer Expenditure Price Index (PCE), excluding the volatile food and energy component, rose 0.1% after rising 0.2% in January. In the 12 months to February, the so-called core PCE price index rose by 1.4%, after rising by 1.5% in January. The core PCE price index is the Fed’s preferred measure of inflation for its 2% target, a flexible average.
“Although inflation will move slightly higher, it will remain well contained for the next few years,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “There is still a lot of weakness in the economy.”
When adjusted for inflation, consumer spending fell 1.2% last month, after rising 3.0% in January. Despite the decline in so-called real consumer spending, 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 Friday, reported by the Department of Commerce, did nothing to dampen enthusiasm for economic growth in this area. quarter.
The report also showed that wholesale stocks gained 0.5% last month and retailers’ stocks changed.
With the latest data in hand, Morgan Stanley economists raised their gross domestic product estimate in the first quarter to an annualized rate of 10.0% from a rate of 8.7%. The economy grew at a rate of 4.3% in the fourth quarter. This year’s growth could exceed 7%, which would be the fastest since 1984. The economy contracted by 3.5% in 2020, the worst performance in 74 years.
Last month’s revenues were depressed by a 27.4% drop in government transfers. Salaries were also fixed. The savings rate fell to 13.6% from 19.8% in January, with economists expecting some of the cash from the latest stimulus checks to be saved. Households save in excess by about $ 1.9 trillion.
“We anticipate that the treasury will exceed $ 2 trillion once the last round of direct checks hits household incomes in March and April,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “This will provide households with ample means to drive spending, not only as the economy reopens this year, but also next year.”
Reporting by Lucia Mutikani Editing by Chizu Nomiyama and Paul Simao