US consumer spending, income temporarily fall ahead of massive fiscal stimulus

WASHINGTON -U.S. consumer spending fell by the most in 10 months in February as a cold snap gripped many parts of the country and the boost from a second round of stimulus checks to middle- and lower-income households faded.

But the drop in consumer spending, the biggest since mandatory shutdowns of nonessential businesses like restaurants last April to slow the spread of COVID-19, is seen as temporary. The economy is poised to log its best performance in 37 years, thanks to the White House's massive US$1.9 trillion pandemic relief package and increased vaccinations against the coronavirus.

"The February pullback in income and spending is only a temporary blip," said Gregory Daco, chief U.S. 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 will provide a powerful lift to consumer spending in March." 

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 1.0per cent last month amid a broad decline in purchases of goods, the Commerce Department said on Friday. That followed a 3.4per cent rebound in January.

Personal income tumbled 7.1per cent after surging 10.1per cent in January. Economists polled by Reuters had forecast consumer spending would decrease 0.7per cent in February and income would decline 7.3per cent.

Unusually harsh weather in the second half of February, including in Texas and other parts of the densely populated South region, depressed homebuilding, production at factories, orders and shipments of manufactured goods.

Temperatures are rising and the relief package approved this month is sending additional US$1,400 checks to qualified households and extending the government safety net for the unemployed through Sept. 6. The labor market recovery is also gaining traction, with first-time applications for unemployed benefits hitting a one-year low last week.

The brightening health and economic outlook boosted consumers' spirits, which bodes well for spending. In a separate report on Friday, the University of Michigan said its consumer sentiment index increased this month by the most in nearly eight years.

Stocks on Wall Street were trading higher. The dollar rose against a basket of other currencies. U.S. Treasury prices were lower.

BROAD DECLINE

Last month, spending on goods dropped 3.0per cent, led by declines in purchases of pharmaceutical products and recreational items. Spending on services edged up 0.1per cent as consumers spent more on utilities and health care at hospitals, offsetting a decrease in outlays at restaurants.

With demand soft, inflation retreated. But prices are expected to accelerate owing to the broader re-opening of the economy and the dropping of last year's weak readings from the calculation, as well as very accommodative fiscal and monetary policy.

Federal Reserve Chair Jerome Powell told lawmakers this week that the anticipated rise in inflation over the course of the year will be "neither particularly large nor persistent."

The personal consumption expenditures (PCE) price index excluding the volatile food and energy component gained 0.1per cent after rising 0.2per cent in January. In the 12 months through February, the so-called core PCE price index climbed 1.4per cent after increasing 1.5per cent in January. The core PCE price index is the Fed's preferred inflation measure for its 2per cent target, a flexible average.

"Although inflation will move somewhat higher, it will remain well-contained over the next few 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 decreased 1.2per cent last month after jumping 3.0per cent in January. Despite the drop in so-called real consumer spending, consumption in the first two months of the first quarter is running well above the fourth quarter average.

A 2.5per cent increase in the goods trade deficit to US$86.7 billion in February, the second highest on record, reported by the Commerce Department in another report on Friday, did nothing to dampen enthusiasm about economic growth this quarter.

The report also showed wholesale inventories gaining 0.5per cent last month and stocks at retailers unchanged.

With latest data in hand, economists at Morgan Stanley raised their first-quarter gross domestic product estimate to a 10.0per cent annualized rate from a 8.7per cent pace. The economy grew at a 4.3per cent pace in the fourth quarter. Growth this year could top 7per cent, which would be the fastest since 1984. The economy contracted 3.5per cent in 2020, the worst performance in 74 years.

Income last month was depressed by a 27.4per cent plunge in government transfers. Wages were also flat. The saving rate fell to a still-high 13.6per cent from 19.8per cent in January, with economists expecting some of the cash from the latest stimulus checks will be saved. Households are sitting on about US$1.9 trillion in excess savings.

"We anticipate that hoard will surpass US$2 trillion once the latest round of direct checks 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 drive spending, not only as the economy re-opens this year, but into next year as well."

(Reporting by Lucia MutikaniEditing by Chizu Nomiyama and Paul Simao)