U.S. consumer spending posted a tiny gain for the third straight month in February while income growth slowed sharply. Consumer spending edged up 0.1% in February, matching similar lackluster gains in January and December, the Commerce Department reported Monday. Personal incomes rose a modest 0.2% in February after a much stronger 0.5% rise in January. The slowdown reflected a 0.1% drop in wages and salaries, the first drop in this key category since September.
Despite recent weakness, economists are still looking for consumer spending to accelerate this year as solid gains in employment boost incomes and fuel more spending. A key price gauge followed by the Federal Reserve showed prices fell 0.1% in February and are up just 1% over the past 12 months. The weakness seen in spending had been expected given an earlier report which showed that retail sales fell in February, pulled down by falling gasoline sales.
Economists still expect that consumer spending will accelerate this year, bolstered by solid gains in hiring. More people working means more income to support spending. The government on Friday revised its estimate for overall economic growth, as measured by the gross domestic product, to show the economy growing at an annual rate of 1.4% in the fourth quarter, an improvement from a previous estimate of 1%. Many economists expect that GDP growth will strengthen further to around 2% in the current January-March quarter, helped by gains in consumer spending.
The Federal Reserve at its meeting this month left a key rate unchanged while signaling that it now expected to boost rates only two times this year, down from a previous expectation of four rate hikes. One thing the Fed is closely watching is the performance of inflation, which for nearly four years has remained below the Fed’s target of an annual price increase of 2% per year. While overall inflation was up just 1% in February, prices excluding food and energy rose 1.7 % for the 12 months ending in February. Fed Chair Janet Yellen will discuss her views on the economy in a highly anticipated speech Tuesday before the Economic Club of New York. The spending report showed that the saving rate edged up slightly to 5.4% of after-tax income in February, compared to 5.3% in January.