US Consumer Spending and Income Temporarily Fall Ahead of Massive Fiscal Stimulus

business news

Lucia Mutikani

WASHINGTON (Reuters) -U.S. Consumer spending fell the most in 10 months in February as a cold snap gripped many parts of the country and fueled a second round of household income stimulus controls. mids and lows faded.

A woman shops in Chinatown amid the coronavirus disease (COVID-19) pandemic in New York City, New York, USA, March 25, 2021. REUTERS / Carlo Allegri
FILE PHOTO: People shop, during the coronavirus disease (COVID-19) pandemic, on Fifth Avenue in New York, USA, February 17, 2021. REUTERS / Brendan McDermid

But the drop in consumer spending, the biggest since mandatory closures of non-essential businesses like restaurants last April to slow the spread of COVID-19, is considered temporary. The economy is poised to post its best performance in 37 years, thanks to the White House’s massive $ 1.9 trillion pandemic aid package and increased coronavirus vaccines.

“The February decline in revenue and spending is just 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 to provide a powerful boost to consumer spending in March.”

Consumer spending, which accounts for more than two-thirds of economic activity in the United States, fell 1.0% last month amid a wide decline in purchases of goods, the Commerce Department said on Friday. That followed a 3.4% rally in January.

Personal income fell 7.1% after rising 10.1% in January. Economists polled by Reuters had forecast that consumer spending would decline 0.7% in February and income would decline 7.3%.

Unusually severe weather in the second half of February, including in Texas and other parts of the densely populated southern region, depressed home construction, factory production, orders and manufactured product shipments.

Temperatures are rising and the aid package approved this month is sending additional checks for $ 1,400 to qualified households and extending the government’s safety net for the unemployed through Sept. 6. a minimum of one year last week.

The improved health and economic outlook boosted consumer sentiment, which bodes well for spending. In a separate report on Friday, the University of Michigan said its consumer confidence index rose this month to the highest in nearly eight years.

Wall Street shares were trading higher. The dollar rose against a basket of other currencies. The prices of US Treasuries fell.


Last month, spending on goods fell 3.0%, driven by declines in purchases of pharmaceuticals and recreational items. Spending on services rose 0.1% as consumers spent more on public services and healthcare in hospitals, offsetting a decrease in outlays at restaurants.

With weak demand, inflation fell back. But prices are expected to accelerate due to the wider reopening of the economy and the drop from last year’s weak readings of 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 throughout the year “will be neither particularly large nor persistent.”

The price index for personal consumption expenditures (PCE), excluding the volatile component of food and energy, rose 0.1% after rising 0.2% in January. In the 12 months to February, the so-called core PCE price index rose 1.4% after rising 1.5% in January. The basic PCE price index is the Fed’s preferred measure of inflation for its 2% target, a flexible average.

“Although inflation will move somewhat higher, it will continue to be well contained for the next several years,” 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 declined 1.2% last month after rising 3.0% in January. Despite the drop 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 goods trade deficit to $ 86.7 billion in February, the second-highest on record, reported by the Commerce Department in another report on Friday, did nothing to curb enthusiasm for the economic growth this quarter.

The report also showed that wholesale inventories rose 0.5% last month and that stocks at retailers were unchanged.

With the latest data in hand, Morgan Stanley economists raised their estimate of first-quarter gross domestic product to an annualized rate of 10.0% from a pace of 8.7%. The economy grew at a 4.3% rate in the fourth quarter. Growth this year could exceed 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 depressed by a 27.4% drop in government transfers. Wages were also flat. The savings rate fell to a still high 13.6% from 19.8% in January, and economists expect some of the cash from the latest stimulus checks to be saved. Households have about $ 1.9 trillion in excess savings.

“We anticipate the treasury to exceed $ 2 trillion once the latest round of direct controls hits household income 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 boost spending, not only as the economy reopens this year, but also next.”

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