Consumption Not Following Income For Now

Personal consumption expenditures inched up only 0.1 percent, but dropped 0.1 percent in real terms. Personal income, on the other hand, increased 0.4 percent, matching January’s increase. 

Real Disposable Income Affected by Increase in Gasoline Prices

As expected, the recent increase in gasoline prices made a large impact on real disposable income in February. After a strong increase in real disposable personal income in January, which jumped 0.9 percent, February’s increase was relatively muted by the increase in gasoline prices. February’s real disposable personal income increased only 0.2 percent. Nominal disposable personal income increased at the same rate as nominal personal income, 0.4 percent. Meanwhile, the BEA also revised personal income higher in January, to 0.4 percent from an original increase of 0.3 percent.

Although personal income increased by 0.4 percent in February, the increase in wages and salaries was cut in half compared to the reading in January. January’s increase in wages and salaries was $47.3 billion while February’s was only $23.9 billion. The biggest culprit was private wages and salaries which increased $44.2 billion in January, compared to just $21.9 billion in February.

However, this soft reading in wages and salaries was compensated by increases in personal income receipts on assets, which increased $19.7 billion in February compared to a decrease of $4.1 billion in January. In addition, personal dividend income increased by $25.3 billion versus an increase of only $1.6 billion in January.

Personal Consumption Expenditures Unseasonably Cold

Although personal income and real disposable personal income have been very strong during the first months of the year, the U.S. consumer stayed home in February, perhaps because of the cold spell affecting some parts of the United States. Personal consumption expenditures increased by only 0.1 percent in nominal terms in February, while declining in real terms by 0.1 percent after a 0.2 percent decline in nominal terms in January and a 0.2 percent increase in real terms.

The mismatch between personal income and personal spending has continued to push the saving rate higher, this time from 5.5 percent in January to 5.8 percent in February. This means that U.S. consumers are holding on to their income, perhaps for future consumption. However, that also means that the first quarter’s personal consumption expenditures (PCE) may be weak, and thus may keep GDP growth in check as well.

The good news is that we expect PCE to strengthen in the following quarters, giving GDP a boost after a weak first quarter. Thus, do not discount a very strong U.S. consumer going forward.