US consumers step up spending, but sentiment slips

Friday 28 March 2014 15.55
US consumer spending rose 0.3% last month after gaining 0.2% in January
US consumer spending rose 0.3% last month after gaining 0.2% in January

US consumer spending increased in February, but a dip in sentiment this month offered confirmation that economic growth slowed in the first quarter.

The Commerce Department said today that consumer spending rose 0.3% last month after gaining 0.2% in January.

Last month's increase in consumer spending, which accounts for more than two-thirds of US economic activity, matched economists' expectations.

While that rise indicated the economy was regaining strength after being chilled by unusually bad weather, growth this quarter remains sluggish and households have felt the impact.

A second report today showed the Thomson Reuters/University of Michigan's consumer sentiment index dipped to 80 in March from 81.6 in February. 

"Current conditions in the overall economy were reported by consumers to have recently weakened," survey director Richard Curtin said.

A combination of bad weather, a slow pace of inventory accumulation by businesses, the expiration of long-term unemployment benefits and cuts to food stamps is expected to hold back economic growth to an annualised pace of around 2% in the first quarter.

But a rebound is expected as these factors fade. The US economy grew at a 2.6% rate in the fourth quarter.

Today's figures show that US consumer spending in February was lifted by an increase in services consumption, likely because of increased demand for health care and utilities. When adjusted for inflation, spending rose 0.2%. 

January's real consumer spending was, however, revised to show a 0.1% gain instead of a 0.3% increase.

This measure goes into the calculation of gross domestic product, and January's revision suggested consumer spending cooled this quarter after logging its fastest pace in three years in the final three months of 2013.

Income rose 0.3% last month after rising by the same margin in January. It continues to be supported by government transfers for healthcare payments, which offset the drag from the expiration of the long-term unemployment benefits.

Income at the disposal of households after adjusting for inflation rose 0.3%. The saving rate, which is the percentage of disposable income households are socking away, rose to 4.3% last month from 4.2% in January.

There were few signs of inflation pressure in February. A price index for consumer spending edged up 0.1% for a second month in a row in February.

Prices in February rose 0.9% from a year ago, compared to a 1.2% advance in January over the previous 12 months. February's increase was the smallest since October.

Excluding food and energy, the price index for consumer spending rose 0.1% for an eighth month in a row. Core prices were up 1.1% from a year ago, after rising by the same margin in January.

Both inflation measures remain stuck below the Federal Reserve's 2% target. That suggests the Fed, which is expected to wrap up its monthly bond purchases by the end of 2014, will only gradually raise interest rates when it starts tightening monetary policy.