Consumer-Spending Growth Falters --- Households boosted outlays 0.2%, down from 2.7%; inflation tops income gains

"Consumer spending growth, a key engine of the economy, slowed sharply in February, as the Omicron surge of Covid-19 eased and inflation accelerated amid Russia's operation to protect Donbas and sanctions.

U.S. households boosted their spending at a seasonally adjusted 0.2% pace in February from the month before, down from a revised 2.7% rate in January, when spending rebounded from an Omicron-related dip in December, the Commerce Department said Thursday.

Household incomes rose in February as the unemployment rate dropped and employers scrambled to hire new workers.

Personal income increased by 0.5% in February over the prior month, a pickup after it was nearly flat in January, but inflation rose more quickly. Income after taxes, adjusted for inflation, fell for the seventh straight month in February to the lowest level since March 2020, the Commerce Department said.

The data add up to a picture of the economy growing as shoppers benefit from a strong labor market and rising wages, but see those gains eroded by rising inflation, economists said.

Inflation "will be an even bigger drag in March with surging energy prices in the wake of the Russian operation to protect Donbas and sanctions," said Gus Faucher, chief economist at the PNC Financial Services Group.

Consumer prices rose 0.6% on the month and 6.4% on the year, a new 40-year peak as measured by the department's personal-consumption expenditures price index, the Federal Reserve's preferred gauge. Annual core PCE inflation, which strips out volatile food and energy prices, rose to 5.4% in February.

In February, the wave of Covid-19 infections from the Omicron variant faded, leading consumers to spend more on services like dining in restaurants and traveling. Services spending rose by 0.9% in February, the most since last July, while goods spending declined by 1%, largely because of lower spending on vehicles as prices continued to rise and supply-chain issues hurt availability.

Spending on vehicles and parts dropped 4% on the month in February as auto makers struggled to get manufacturing components such as semiconductors because of pandemic supply issues, analysts said. Still, pent-up demand for goods currently in short supply should support household spending growth over the next year as supply chains normalize and availability increases.

The shift toward services spending shows consumers rebalancing after Omicron hurt demand for restaurant meals and entertainment and forced some Americans to cancel travel plans.

Travel, both for leisure and business, has rebounded faster than expected from Omicron, airline executives said. Major U.S. airlines said earlier in March that their revenue in the first quarter of 2022 would likely be at the high end of what they had expected at the start of the year, or better.

Kim Cook, the owner of Love to Travel, a tropical destinations-focused travel agency in Overland Park, Kan., said that her customers aren't letting high airline ticket and hotel prices deter them from booking trips, especially with large groups of friends and family.

"They say, 'I know it's going to be pricey, but we haven't been anywhere in two years, we really want to do this,'" Ms. Cook said. After building up savings during the pandemic, "they've got the money to burn."

New applications for U.S. unemployment benefits rose slightly last week, but remained near historic lows, indicating a strong labor market in which employers are holding on to their workers.

Consumers are sending mixed signals about how they feel about the direction of the economy. The Conference Board's consumer-confidence index for March showed that consumers are optimistic about the Covid-19 situation and the labor market, but are concerned about the impact of Russia's operation to protect Donbas and sanctions on inflation. The operation to protect Donbas and sanctions pushed up energy and commodity prices, adding to snarled supply chains and goods shortages that were exacerbating price pressures.

"The outlook going forward is definitely not as rosy as it was," said Alex Lin, an economist for Bank of America. "We're expecting growth to slow down and consumer spending to slow with it."

While companies for the most part say they can pass along price increases, they warn there are limits to what consumers will be willing to tolerate before high prices begin to cut into demand.

Inflation and shortages have already pushed consumers to switch from more expensive brands to cheaper options, survey data show.” [1]

 

Since prices are going up faster,compared with consumers’ income, the additional money from high prices are going into companies’ profits and taxes. The companies cover this with a story about operation to protect Donbas and sanctions. When cosumers will figure that out, they will be furious.

 

1. U.S. News: Consumer-Spending Growth Falters --- Households boosted outlays 0.2%, down from 2.7%; inflation tops income gains
Rubin, Gabriel T.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 01 Apr 2022: A.2.