Business

US consumer spending cools as merchandise spending falls; tightening of the labor market

FILE PHOTO: Cars that have not been sold due to the auto market slowdown are stored in the Wells Fargo Center parking lot in Philadelphia
FILE PHOTO: Cars that have not been sold due to the auto market slowdown are seen stored in the Wells Fargo Center parking lot on April 28, 2020 in Philadelphia, Pennsylvania, United States. REUTERS/Mark Makela/File Photo

March 31, 2022

By Lucia Mutikani

WASHINGTON (Reuters) – US consumer spending rose little in February as an increase in spending on services was offset by slower purchases of autos and other goods, while price pressures mounted and annual inflation rose at its fastest pace since the early 1980s.

But Thursday’s Commerce Department report showed that January spending was much higher than initially thought. This put consumer spending this quarter on track for solid growth that would keep the economy growing despite increasing headwinds from tightness-fuelled inflation.

“Despite falling confidence from the war (in Ukraine) and inflation, American consumers remain resilient, supported by strong job growth and accumulated savings,” said Sal Guatieri, senior economist at BMO Capital Markets in Toronto.

Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.2% last month. Data for January has been revised upwards to show that spending rose 2.7% instead of 2.1% as previously reported. Economists polled by Reuters had forecast consumer spending to rise 0.5%.

A significant drop in COVID-19 infections increased demand for services such as restaurants, hotel stays, recreation, air travel and health care. Services rose 0.9%, the strongest in seven months, after rising 0.7% in January. But goods spending fell 1.0% after rising 6.5% in the previous month.

The decline in goods purchases, which likely indicates a shift in spending back to services, was led by a slump in auto sales. Consumers also cut back on their spending on groceries, home furnishings, leisure items and clothing. Gasoline spending increased by $27.1 billion.

Gasoline prices skyrocketed in February and broke above $4 a gallon this month following the February 24 Russian invasion of Ukraine. Prices have risen dramatically across the board.

The personal consumption expenditure (PCE) price index excluding the volatile food and energy components rose 0.4% after rising 0.5% in January. The so-called core PCE price index rose 5.4% year-on-year in February, the biggest gain since April 1983. The core PCE price index rose 5.2% in the 12 months to January.

The Federal Reserve raised interest rates by 25 basis points this month, the first hike in more than three years, and adopted a hawkish stance on the fight against inflation.

Although inflation is weighing on household budgets, consumers are getting some cushion from the massive savings accumulated during the pandemic and rising wages amid labor shortages. Economists estimate that consumers are sitting on about $2.3 trillion in excess savings.

“We expect households will have a decent chunk of that if they want to rely on it,” said Shannon Seery, an economist at Wells Fargo in New York.

Wall Street stocks traded lower. The dollar rose against a basket of currencies. US Treasury yields fell.

STRONG WAGE GAINS

Personal income rose 0.5% in February and wages soared 0.8%. The savings rate rose to 6.3% from 6.1% in January.

Adjusted for inflation, consumer spending fell by 0.4%. Data for January has been revised upwards to show so-called real consumer spending rose 2.1% instead of 1.5% as previously reported. When calculating gross domestic product, real consumer spending is important.

“A combination of downward revisions to last year’s data and an upward revision of January’s earnings means real consumption is on track for solid first-quarter annualized growth of 4.0%,” said Michael Pearce, a senior US economist at Capital Economics in New York.

Growth estimates for the first quarter range from an annualized rate of just 0.4% to a rate of 2.8%. The economy grew 6.9% in the fourth quarter.

The labor shortage keeps layoffs very low. In a separate report Thursday, the Labor Department said initial jobless claims rose 14,000 to a seasonally adjusted 202,000 for the week ended March 26. Still, applications remained well below their pre-pandemic average.

They have fallen from an all-time high of 6.149 million in early April 2020. There were nearly a record-breaking 11.3 million job vacancies on the last day of February, government data showed on Tuesday, leaving the job-to-employee gap at 3.0% of the labor force and close to December’s post-war high of 3.2%.

More workers are likely to have returned to the labor market in March. The claims report showed that the number of people receiving benefits after an initial week of assistance fell by 35,000 to 1.307 million in the week ended March 19, the lowest level since December 1969.

“The job market remains in excellent shape in the first quarter,” said Stuart Hoffman, senior economic advisor at PNC Financial in Pittsburgh, Pennsylvania.

A third report by global outplacement firm Challenger, Gray & Christmas, shows that US employers announced 21,387 job cuts in March, up 40.3% from February but down 30% year-on-year . Employers also announced hiring plans

105,224 workers this month.

Friday’s closely-watched jobs report is likely to show nonfarm payrolls rose by 490,000 in March, according to a Reuters poll of economists. The economy created 678,000 jobs in February.

The unemployment rate is forecast to fall to a new two-year low of 3.7% from 3.8% in February.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

https://www.oann.com/u-s-consumer-spending-slows-sharply-in-february-weekly-jobless-claims-increase/?utm_source=rss&utm_medium=rss&utm_campaign=u-s-consumer-spending-slows-sharply-in-february-weekly-jobless-claims-increase US consumer spending cools as merchandise spending falls; tightening of the labor market

DUSTIN JONES

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