On March 17, a man shopped for sandals at a Ross Dress for Less store in Alhambra, California. Recent data released on Thursday indicated that U.S. consumer spending continued in February, although the increase barely kept pace with rising prices. The conflict involving Iran is anticipated to further drive up living costs. A report from the U.S. Commerce Department, delayed due to a government shutdown, showed consumer spending increased 0.5% month-over-month in February, up from a 0.3% rise in January. However, after adjusting for high inflation, real consumer spending grew by only 0.1% compared to the previous month, following a flat reading in January. Thursday's report also highlighted that inflation remains significantly above normal levels. The Personal Consumption Expenditures (PCE) price index, which the Federal Reserve uses to monitor its 2% inflation target, rose 0.4% from the previous month and held steady at a 2.8% increase year-over-year. Excluding volatile food and energy categories, the core PCE price index also increased 0.4% month-over-month. The annual rate climbed to 3.0%, up from 2.9% the previous month. Sal Guatieri, Senior Economist at BMO Capital Markets, noted in a report to investors, "Core prices are effectively accelerating, with the three-month annualized rate reaching 4.4%, higher than the 3.4% pace over the prior six months... and this is before accounting for spillover pressures from the Iran conflict. Goods prices surged 0.7% month-over-month, the largest increase in nearly four years, indicating persistent effects from tariffs." Consumers appear to be dipping into savings to support spending. Real after-tax income, adjusted for inflation, fell 0.5% from the previous month, and the personal savings rate declined from 4.5% to 4.0%. Economists from Pantheon Macroeconomics stated on Thursday, "The 0.5% decline in real after-tax income in February is difficult to reconcile with the Treasury's reported large personal tax refunds, but in any case, the overall trend in nominal income growth remains very weak." The firm's economists suggested that tax refunds might boost household income in March and April, but rapid increases in oil and other goods prices could quickly erode those gains. According to a Reuters survey, economists had expected overall prices to rise 0.3% month-over-month, with the annual rate holding at 2.8%. For the core PCE index, excluding food and energy, they anticipated a 0.4% monthly increase. The projected annual rate was 3.0%, a slight decrease from a preliminary 3.1%, partly due to a high base effect from the previous year.
U.S. Economic Growth Was Weaker Than Previously Estimated A separate report from the Commerce Department on Thursday indicated that U.S. economic growth was slower than previously reported in the months leading up to the globally significant conflict involving the U.S., Israel, and Iran. In the fourth quarter (October-December), Gross Domestic Product (GDP), a measure of total economic output, grew at an annualized rate of 0.5%. This was lower than the second estimate of 0.7% and significantly below the initial reading of 1.4%. The latest revision incorporated new data showing weaker business investment during the quarter, which included a record 43-day partial U.S. government shutdown. BMO's Guatieri suggested that the series of economic reports released on Thursday, combined with expectations that the conflict will boost inflation through energy and supply chain shocks, implies that Federal Reserve policymakers may be even less inclined to cut interest rates. He wrote, "Overall inflation could approach 4% in the short term, leaving little chance of a Fed rate cut in the near future."
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