US Personal Spending Rises in February, Personal Income Flat

Personal consumer expenditure (PCE) rose 0.3% in February following January’s downwardly revised 0.4% gain (initially reported as 0.5%).  The rise in spending in the month equalled market expectations going into today’s report.  February’s rise in spending was in spite of unchanged personal income, although this followed gains of 0.3% (revised from 0.1%) and 0.4% (revised from 0.3%) in January and December, respectively.  Personal disposable income was unchanged in February, which, combined with the increase in spending, pushed the saving rate down to 3.1% from 3.4% in January.

Rising consumption of non-durable goods and services accounted for the overall spending increase in February with some offset from declining expenditure on durable goods. Spending on non-durable goods rose 0.7% in February, building further on the 1.7% (was 1.8%) rise reported in January. Spending on services was up for a ninth-consecutive month, rising 0.3% following a 0.2% gain the prior month.  Spending on durable goods fell 0.4% in the month, which was consistent with an earlier reported 4% drop in unit auto sales.  Initial reports from the auto industry suggest that the weakness in consumer durables may be at least partially reversed in March.

With respect to prices, the overall PCE deflator was for the most part unchanged in February resulting in a slight moderation in the year-over-year rate of increase to 1.8% from the 2.1% annual rise recorded in January.  Excluding the effect of food and energy prices, the core PCE index was flat in February, resulting in the annual increase falling to 1.3% in the month from 1.5% in January and 1.6% in December.

The gain in the volume of PCE in February equalled the nominal increase, rising 0.3% in the month and boosted by higher sales volumes of non-durable goods (0.9%) and services (0.3%).  The volume of spending on consumer durables fell 0.2% in the month.

The rise in personal spending in February for a fifth-consecutive month is encouraging and suggests some moderate upside risk to our current forecast that PCE, on a quarterly annualized basis, rose 2.4% in the first quarter of 2010 following gains of 1.6% and 2.8% in the fourth and third quarters of last year, respectively.  Furthermore, while the improvement in personal spending over the past few quarters has been fuelled in a large part by pent-up demand accumulated during the recession, we expect that going forward improving labour markets will be sufficient to sustain positive income growth and a moderate recovery in consumer spending throughout 2010. 

Given the large amount of economic slack generated by the recent recession (as evident in February’s still elevated 9.7% unemployment rate) and still subdued inflation, however, we expect policy to remain highly stimulative until the economic recovery is on more solid footing.   We do not expect an increase in the Fed funds target from the current 0% to 0.25% range until the end of this year.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.