WASHINGTON – U.S. consumers increased their spending at the weakest pace in six months, while the 12-month rise in consumer prices was the largest in nearly five years.
Consumer spending edged up 0.1 percent in February following a similarly sluggish 0.2 percent increase in January, the Commerce Department reported Friday. The small gains suggest that overall economic growth likely slowed in the first quarter.
Incomes, however, were up a solid 0.4 percent in February, offering hope for stronger consumer spending in the months ahead.
Meanwhile, an inflation gauge closely watched by the Federal Reserve increased 2.1 percent in February compared to a year ago. It is the sharpest 12-month rise since March 2012 and slightly above the Fed’s 2 percent inflation target.
The Fed raised a key interest rate in March, just three months after a hike in December. Officials have sent signals that the pace of rate hikes will accelerate this year after seven years of stagnant rates at a record low near zero. In the last two years, the Fed nudged rates up just one time in each of those years.
The overall economy grew at a 2.1 percent rate in the October-December quarter, supported by a strong gain in consumer spending.
But with the recent weakness in spending, which accounts for 70 percent of economic activity, many analysts believe growth in the January-March quarter could slow to a rate of 1.5 percent or less before accelerating in the months ahead.
“Consumer spending is likely to pick up in March and the second quarter due to a sudden surge in tax refunds in the latter half of February, elevated levels of consumer mood, strong stock market performance, rising employment and disposable income and household wealth,” predicted Chris G. Christopher Jr., director of consumer economics at HIS Markit.
Many economists expect the economy will accelerate later this year to rates around 2.5 percent or more if President Donald Trump is successful in winning approval for his economic stimulus package, which includes tax cuts, infrastructure spending increases and deregulation.
Another reason for the optimistic spending outlook is the recent surge in consumer confidence, which by the Conference Board’s measure hit a 16-year high in March.
The February spending figure reflected in part an unusually mild winter, which sapped demand for utilities. Services, the category that covers utility payments, was up just 0.1 percent. Spending on goods was also weak, with purchases of long-lasting durable goods such as autos down 0.1 percent. Nondurable goods spending showed no change.
The combination of a strong gain in incomes and modest rise in spending pushed the saving rate up to 5.6 percent of after-tax income in February, the highest level since October and up from 5.4 percent in January.