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Consumer spending rose more modestly in February after a sharp jump at the start of the year, while inflation cooled but remained elevated.
Households boosted their spending by a seasonally adjusted 0.2% in February from the prior month, the Commerce Department said Friday. That followed a revised 2% increase in January, but economists said the two months viewed together represented a solid gain as 2023 got under way.
“February’s consumer spending numbers should be viewed as quite strong,” said
Pooja Sriram,
U.S. economist at
“Households continue to feel the tailwind from strong gains in wages and salaries, fueled by strong labor demand, and continue to dip into excess savings accumulated during the pandemic for additional firepower.”
Inflation continued to take a bite out of spending power, however. When adjusted for rising prices, household spending fell 0.1% in February from the prior month, after rising a revised 1.5% in January.
The February figures don’t reflect any impact on consumer spending from banking industry turmoil, which emerged in March.
Inflation eased in February, though it remains significantly above the Federal Reserve’s 2% target. The personal consumption-expenditures price index climbed 5% in February from a year earlier, down from 5.3% in January.
The core-PCE price index—which omits volatile food and energy prices—rose 4.6% in February from a year earlier, compared with 4.7% the prior month. The Fed sees the core measure as a better predictor of future inflation.
U.S. stocks rose on Friday after the softer inflation and spending figures.
The Fed raised short-term interest rates by a quarter-percentage point on March 22, its ninth straight increase aimed at curbing inflation by slowing the economy. It lifted its benchmark federal-funds rate to a range between 4.75% and 5%, the highest level since September 2007.
Though inflation remains high, Fed Chair
Jerome Powell
signaled last week that the central bank could stop raising interest rates sooner than previously thought if the recent banking system stress triggers a pullback in lending.
In the weeks before the banking crisis, the economy showed surprising strength despite the Fed’s rate increases. Employers added a seasonally adjusted 311,000 jobs in February and the unemployment rate was 3.6%, near historic lows, the Labor Department said. Home sales rose in February from the prior month for the first time in a year.
Early signs indicate that the economy stayed on a solid track in March. Surveys showed that U.S. business activity picked up along with consumer confidence in the economic outlook. Initial jobless claims, a proxy for layoffs, are hovering near historically low levels.
But banking tumult—and tighter lending that might result—will influence business investments more directly than consumer spending, said
Oren Klachkin,
lead U.S. economist at Oxford Economics.
With consumer spending accounting for around two-thirds of output, a strong labor market translates to a resilient economy, economists said.
“Even though we’re seeing layoffs in tech, with unemployment at 3.6%, what you have is that people who want jobs can get jobs,” said
Leo Feler,
chief economist at Numerator, a consumer insights and data company. “That means households have income and spending power.”
Consumers’ spending accounts for around two-thirds of U.S. economic output, making it the key to growth.
Their spending on goods rose 3.7% in February from December, lifted by increased outlays on furniture, electronics and pleasure boats. Spending on services picked up 1.5% in the same period, as consumers shelled out more on air travel and at movie theaters, restaurants and amusement parks.
Household finances also got a boost in February, the Commerce report showed. Income rose 0.3% in February from the prior month, pushed up by increasing wages for service sector workers in particular, said Oren Klachkin, lead U.S. economist at Oxford Economics.
And the personal saving rate was 4.6% in February, the highest in more than a year.
Chandler Atkins,
owner of Elms Waterfront Cottages in Lake Luzerne, N.Y., said bookings are as strong as last year with people visiting from across the country. When the economy turns down, New Yorkers tend to dominate bookings as they dial back more ambitious travel plans, he said. But when times are good, those from farther afield pick up.
“I just took a couple bookings yesterday from people in California,” he said. “They must feel that the economy is strong enough and they’re not facing recession stress right now. Inflation is coming down right now, even though it’s happening slowly. It’s causing people to feel like things are getting better, not worse, I think.”
Mr. Atkins is expanding his business, launching a new lodging and events venue and an all-terrain vehicle track on Memorial Day. He is keeping an eye on banking industry troubles but isn’t overly concerned. “I don’t think that’s really going to have an impact on the vacationer this year,” he said.
Solid consumer demand is putting price pressure on services, as consumers shell out on sporting events, concerts, packaged tours, restaurants and other recreation, said
Luke Tilley,
chief economist at Wilmington Trust Investment Advisors Inc.
“The price increases for some of these recreation services are just astronomical,” he said. “People are slowing their spending overall but basically, companies are able to pass on some more price increases because people are willing to pay.”
Still, higher prices are driving some consumers to seek to cut costs—sometimes in dramatic ways.
John Johnson,
a 39-year-old mechanical engineer, is fleeing the Washington, D.C. suburbs for Pittsburgh in May in search of a lower cost of living. He and his wife, Elizabeth, had settled in Takoma Park, Md., eight years ago due to its proximity to public transit. But her job is now fully remote, and the neighborhood is relatively pricey.
“Last night we went out and paid $8 for a beer—you can buy a decent bottle of wine for something like that. And even though inflation is 6%, restaurants are 20% or 30% more expensive,” he said. “We’ve both had pay increases over the past three or four years, but those gains have evened out or even gone negative.”
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The couple made plans to renovate their kitchen due to spending more time cooking at home since the pandemic. But they struggled to find contractors and, when they did, couldn’t afford the high prices. That is when Mr. Johnson started looking for a job elsewhere.
“The house we’re getting in Pittsburgh is pretty much three times bigger than our current house, and only 25% more expensive,” he said.
Write to Gwynn Guilford at gwynn.guilford@wsj.com
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