Consumer spending rises slightly in February, though falls in real dollars

The U.S. consumer's belt tightening resumes. Although consumer spending rose 0.2 percent in February, real consumer spending (which takes inflation into account) actually fell 0.2 percent, the U.S. Commerce Department announced Friday.

Both figures suggest a return to consumer frugality after a brief respite in January, when consumer spending showed real growth. A Bloomberg News survey had forecast an 0.3 percent rise in February consumer spending, after a 0.7 percent rise in January.

In February, real spending on durable goods declined 1.5 percent; real spending on non-durable goods and services was unchanged.

February personal income dips

Meanwhile, personal income declined 0.2 percent in February, in-line with the Bloomberg survey estimate, as wages and salaries fell 0.3 percent in nominal terms. It's the lowest level for wages since April 2008. After-tax disposable income dipped 0.1 percent, and 0.4 percent after adjusting for inflation. Personal income had risen 0.4 percent in January.

All other income sources declined in February, except transfer payments (a segment which includes Social Security payments and unemployment compensation benefits), which increased 0.8 percent. Business income dipped -0.1 percent, and asset income declined -1.3 percent.

Further, on a year-over-year basis, real disposable income has increased 2.2 percent, but real consumer spending is down -1.4 percent.

New era for U.S. consumers

Lindsey Piegza, an economic analyst for FTN Financial in New York, said consumers have stopped their buying binge, and have taken a decidedly reserved stance since the recession set in.

"We're seeing a minimal amount of consumption, as people are just spending on bare necessities," Piegza told Bloomberg News Friday. "You can't have stable consumer spending until you have stable incomes or wealth accumulation."

Meanwhile, consumer prices increased 0.3 percent in February -- identical to January's rise. Meanwhile, the Core PCE Price Index, which the U.S. Federal Reserve closely monitors for a read on inflation, increased 0.2 percent, in-line with the Bloomberg News survey. The Core PCE had increased 0.1 percent in January.

During the past year, consumer prices have risen one percent and core prices are up 1.7 percent.

Economic Analysis: In addition to the 0.2 percent real decline in consumer spending in February, the key stat is the year-over-year income and consumer spending trend. Since February 2008, real incomes have increased, but real consumer spending is down, and that reflects a frugal consumer pulling back the reins on spending during a period of economic uncertainty. Consumers are holding off purchases and increasing savings to guard against worse news on the economic front that may affect them.

Another stat investors should pay attention to: the modest one percent increase in consumer prices and 1.7 percent increase in core prices -- each is well within the Fed's 'comfort zone' for inflation. In fact, the small one percent yearly price rise signals that a scent of deflation may be in the air -- something that the U.S. economy must avoid and that the Fed will guard against. Deflation -- a protracted, systematic decline in prices and wages -- occurs in pronounced recessions where demand is weak and falling. It robs companies of the ability to increase revenue and damages the economy's ability to grow.
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