Consumers Spend Less, Prices Continue Rising: What We Learned During the Week of February 27 – March 3

Personal spending took a pause while inflation continued to firm in January. Here are the 5 things we learned from U.S. economic data released during the week ending March 3.

#1Personal spending and income softened during January, inflation did not. The Bureau of Economic Analysis reports that “real” personal consumption expenditures (PCE) declined 0.3% during the month following gains of 0.3% in December and 0.2% in November. Real spending on goods also fell by 0.3%, pulled down a 0.8% drop in durable goods spending. Real spending on nondurable goods held steady during January while that on services declined 0.2%. Versus a year earlier, real personal spending has grown 2.8%, with a 4.3% jump in spending on goods and an 8.8% bump up in spending on durable goods. On a nominal (not price adjusted) basis, personal consumption expenditures were at a seasonally adjusted annualized rate (SAAR) of $13.550 trillion, up 0.2% for the month. Nominal personal income increased 0.4% during the month to $16.371 trillion (SAAR). Disposable income grew 0.3% on a nominal basis but fell 0.2% after adjustments for inflation. Real disposable income has increased 2.0% over the past year, reflecting a sharp decline from 12-month comparables for disposable income reported recently. The savings rate inched up by 1/10th of a percentage point to +5.5%.

Meanwhile, the PCE deflator, a measure of price changes, jumped 0.4% during the month and was up 1.9% over the past year. Net of energy and food, the core PCE deflator gained 0.3% in January and was up 1.7% from a year earlier. With the price measures moving ever so more closely to its two-percent target for inflation, the Federal Reserve appears primed to raise the fed funds target rate as soon as its next FOMC meeting.inflation-pce-deflator-030417

#2A new report keeps Q4 2016 economic growth at a moderate rate. The Bureau of Economic Analysis’ 2nd estimate of Q4 2016 Gross Domestic Product (GDP) finds the U.S. economy grew 1.9% on a seasonally adjusted annualized rate, matching the growth rate reported a month ago. For all of 2016, GDP grew 1.6%, down from the 2.6% growth rate of 2015 and the slowest pace of economic expansion since 2011. As with the previously reported Q4 GDP estimate, the biggest contributors to economic growth during the quarter were personal consumption, the change in private inventories, fixed residential investment, fixed nonresidential investment, and government spending. Net exports, however, were a significant drag on GDP during the quarter. The BEA will once again revise its Q4 2016 GDP estimate in a few weeks.

#3Net of aircraft orders, durable orders chilled during January. The Census Bureau estimates that new orders for manufactured durable goods totaled $230.4 billion during the month, up 1.8% from December. New orders for civilian and defense aircraft rose 69.9% and 59.9%, respectively. In all, transportation goods orders grew 8.0% during the month (automobile orders edged up 0.2%). Net of transportation goods, durable goods orders slipped 0.2% in January. Rising during the month were orders for computers (+3.9%), fabricated metal products (+1.9%), and machinery (+0.5%). Falling were new orders for communications equipment (-5.0%), electrical equipment/appliances (-2.2%), and primary metals (-1.6%). A proxy for business investment (new orders for nondefense capital goods net of aircraft) declined 0.4% during January.

#4Purchasing managers report strong business activity during February. The Purchasing Managers Index (PMI) from the Institute for Supply Management added 1.7 points during the month to a seasonally adjusted 57.7. This was the 6th straight month in which the PMI was above a reading of 50.0 (indicative of a growing manufacturing sector) and its highest reading since August 2014. 4 of 5 PMI components improved during the month: new orders (up 4.7 points to 65.1), inventories (up 3.0 points to 51.5), production (up 1.5 points to 62.9), and supplier deliveries (up 1.2 points to 54.8). The employment index declined during the month, shedding 1.9 points to a reading of 54.2. 17 of 18 manufacturing industries expanded during the month, led by growth in textiles, apparel, and machinery. The press release noted that survey respondents had reported “strong” sales and a “positive view of business conditions,” but also had “a watchful eye on commodities and the potential for inflation.”

The ISM’s measure of service sector business activity added 1.1 points during February, putting the “NMI” to a seasonally adjusted reading of 57.6. This was the 86th straight month in which the measure was above a reading of 50.0 and its highest point since October 2015. 3 of 4 index component grew from their January readings: business activity/production (up 3.3 points to 63.6), new orders (up 2.6 up 61.2), and employment (up a half point to 55.2). The supplier deliveries index lost 2.0 points to 50.5. 16 of 18 tracked nonmanufacturing sectors reported growth during February, including utilities, mining, and management of companies/support services. While most survey respondents shared a “positive outlook on business conditions and the overall economy,” the press release indicated that some comments pointed to some “uncertainty.”

#5Construction spending slowed during January. The Census Bureau reports that the value of construction put in place fell 1.0% during the month to a seasonally adjusted annualized rate of $1.180 trillion. This was 3.1% ahead of the January 2016 pace. The decline in construction spending during the month was led by a 5.0% drop in public sector spending to $268.7 billion (-9.0% vs. January 2016). Private sector spending, on the other hand, edged up 0.2% to $911.6 billion (+7.3% vs. January 2016). Private sector residential construction spending grew 0.5% during the month, including gains of 1.1% and 2.2% for new single-family and multi-family home construction, respectively. Private sector residential construction has risen 5.9% over the past year.

Other U.S. economic data released over the past week:
Jobless Claims (week ending February 25, 2017, First-Time Claims, seasonally adjusted): 223,000 (-19,000 vs. previous week; -39,000 vs. the same week a year earlier). 4-week moving average: 244,250 (-10.3% vs. the same week a year earlier).
Vehicle Sales (February 2017, Light Vehicle Sales, seasonally adjusted annualized rate): 17.58 million (unchanged vs. January 2017, -0.1% vs. February 2017).
Pending Home Sales (January 2017, Index (2001 = 100), seasonally adjusted): 106.4 (-2.8% vs. December 2016, +0.4% vs. January 2016).
Agricultural Prices (January 2017, Prices Received by Farmers (Index: 2011 = 100), seasonally adjusted): 86.4 (-1.6% vs. December 2016, -2.9% vs. January 2016).
Beige Book
Case-Shiller Home Price Index (December 2016, 20-City Index, seasonally adjusted): +0.9% vs. November 2016, +5.6% vs. December 2015.

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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