Consumer Spending Tepid as Americans Strive to Save More

Consumer Price Index Rises For First Time Since October
Scott Olson/Getty Images
By Lucia Mutikani

WASHINGTON -- U.S. consumer spending barely rose in February as households used the windfall from lower gasoline prices to boost savings to the highest level in more than two years, the latest sign that the economy hit a soft patch in the first quarter.

Economic growth has been undercut by bad winter weather, a strong dollar, a now-settled labor dispute at busy West Coast ports and softer demand in Europe and Asia. While the slowdown in activity is likely temporary, it could prompt the Federal Reserve to delay raising interest rates until later this year.

%VIRTUAL-pullquote-We expect spending activity to rebound meaningfully in the coming months as the weather setback dissipates...%"We expect spending activity to rebound meaningfully in the coming months as the weather setback dissipates, but the very weak tone in the data will likely continue to temper the impulse at the Fed to tightening policy in the near-term," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Commerce Department said Monday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, edged up 0.1 percent last month after dropping 0.2 percent in January.

Households cut back on purchases of big-ticket items like automobiles, but a cold snap lifted spending on utilities.

Economists had forecast spending gaining 0.2 percent.

When adjusted for inflation, spending fell 0.1 percent, the weakest reading since April of last year, after rising 0.2 percent in January.

Investors on Wall Street largely ignored the data, focusing attention on a raft of biotechnology merger deals. U.S. stocks were trading higher.

The dollar gained against a basket of currencies and prices for U.S. government debt also rose.

Slowing Consumption

Consumer spending, which grew at its quickest pace in more than eight years in the fourth quarter, has lost momentum in part because of bad weather and a greater propensity by households to save money and reduce debt.

February's soft report prompted economists to further cut their first-quarter GDP growth estimates.

Forecasting firm Macroeconomic Advisers lowered its estimate by two-tenths of a percentage point to a 0.9 percent annual pace. Barclays (BCS) cut its forecast to a 1 percent rate from 1.2 percent, while Morgan Stanley (MS) now sees a 0.8 percent growth pace instead of 0.9 percent.

While households appear to have pocketed the bulk of their savings from lower gasoline prices or used the money to pay down debt, economists expect improved household balance sheets and a tightening labor market to boost consumer spending this year.

Income rose 0.4 percent last month after a similar gain in January. Savings jumped to $768.6 billion, the highest level since December 2012, from $728.7 billion in January.

The saving rate rose to 5.8 percent, also the highest since December 2012, from 5.5 percent in January.

"Consumers have a lot of pent-up spending power once the economy gets past the winter doldrums," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

There already are signs that a thaw is underway.

In a separate report, the National Association of Realtors said its pending home sales index, based on signed contracts, rose 3.1 percent in February to its highest level since June 2013. That indicated a pick-up in home sales.

Harsh winter weather has hurt parts of the housing sector.

There was a slight uptick in prices last month, suggesting a recent disinflationary trend had run its course, but inflation remains well below the Fed's 2 percent target.

Fed Chair Janet Yellen signaled Friday that the U.S. central bank would likely start raising interest rates later this year, even amid low-running inflation. The Fed has held its key short-term interest rate near zero since December 2008.

A price index for consumer spending increased 0.2 percent in February after falling 0.4 percent in January. In the 12 months through February, the personal consumption expenditures, or PCE, price index rose 0.3 percent.

Excluding food and energy, prices edged up 0.1 percent after a similar gain in January. The so-called core PCE price index increased 1.4 percent in the 12 months through February.

"This should reassure the Fed that recent low headline inflation readings are the result of transitory energy price declines and that inflation is likely to rise toward the Fed's target over time," said John Ryding, chief economist at RDQ Economics in New York.

9 Numbers That'll Tell You How the Economy's Really Doing
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Consumer Spending Tepid as Americans Strive to Save More
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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