March 26, 2021
By Lucia Mutikani
WASHINGTON (Reuters) – 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, though the decline is likely temporary.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 1.0% last month after rebounding 3.4% in January, the Commerce Department said on Friday. That was the largest drop since April 2020, when the economy was reeling from the shutdown of nonessential businesses like restaurants to slow the spread of COVID-19 infections.
Personal income tumbled 7.1% after surging 10.1% in January. Economists polled by Reuters had forecast consumer spending would decrease 0.7% in February and income would decline 7.3%.
Unseasonably harsh weather in the second half of February, including severe winter storms in Texas and other parts of the densely populated South region, depressed homebuilding, production at factories, orders and shipments of manufactured goods last month.
But activity is expected to rebound in March amid warmer weather, the White House’s $1.9 trillion pandemic rescue package and increased vaccinations against the coronavirus.
The massive relief package approved this month is sending additional $1,400 checks to qualified households and extending the government safety net for the unemployed through Sept. 6. The government reported on Thursday that first-time applications for unemployed benefits dropped to a one-year low last week.
U.S. stocks opened higher. The dollar rose against a basket of other currencies. U.S. Treasury prices were lower.
Last month’s decrease in consumer spending occurred across the board, with steep declines in purchases of pharmaceutical products and recreational goods. Spending on goods dropped 3.0% after soaring 8.4% in January.
Spending on services edged up 0.1% after increasing 0.9% in January. Consumers spent more on utilities and health care at hospitals, but cut back on dining out.
With demand soft, inflation retreated last month. But prices are expected to accelerate beginning in March 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 0.1% after rising 0.2% in January. In the 12 months through February, the so-called core PCE price index climbed 1.4% after increasing 1.5% in January. The core PCE price index is the Fed’s preferred inflation measure for its 2% target, a flexible average.
When adjusted for inflation, consumer spending decreased 1.2% last month after jumping 3.0% in January. The drop in so-called real consumer spending did nothing to dampen enthusiasm about economic growth in the first quarter, with a sharp reversal anticipated in the coming months.
The economy is forecast to grow by as much as a 7.5% rate this quarter after expanding at a 4.3% pace in the fourth quarter. Growth this year could top 7%, which would be the fastest since 1984. The economy contracted 3.5% in 2020, the worst performance in 74 years.
Income last month was depressed by a decrease in government transfers. Wages were also flat. The saving rate fell to a still-high 13.6% from 19.8% in January.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)