US: Spending Remains Steady, PCE Deflator Trends Lower in March

Personal income grew 0.3% month-on-month (m/m) in March, equal to February’s growth and above market expectations for a more modest 0.2% m/m gain. Compensation of employees (+0.3% m/m) accounted for most of the growth, in addition to upticks in dividend and rental income.

Subtracting inflation and taxes, real personal disposable income rose 0.3% m/m in March, accelerating from 0.2% in February.

Personal consumption was unchanged from the previous month, falling slightly from 0.1% m/m in February. This was above the 0.1% decrease expected by the consensus. Services spending rose by 0.4% m/m, while goods spending fell by 0.6% m/m.

• Housing & utilities and health care were the largest contributors in the services sector.
• Declines in motor vehicles & parts and gasoline & other energy goods weighed on goods spending.

Adjusting for inflation, real spending was unchanged from February, above the consensus estimate for a 0.1% decline. In real terms, goods spending fell 0.4% m/m, while services spending rose 0.1%.

The personal consumption price deflator rose 0.1% m/m, and 4.2% on a year-on-year (y/y) basis – slightly above the expected 4.1% y/y reading but slower than the 5.1% y/y reading in February.

The Fed’s preferred measure of inflation – core PCE – rose 0.3% m/m. This was on par with expectations and equal to the 0.3% m/m uptick in February. On an annual basis, price gains decelerated to 4.6% y/y from the upwardly revised 4.7% y/y print the previous month. This was slightly above market expectations of 4.5% y/y.

The personal saving rate was 5.1% in March, above the upwardly revised 4.8% reading in February.

Key Implications

The first quarter’s spending came in at a 3.7% quarter-on-quarter (annualized) pace, cooling from the fourth quarter of 2022. January’s weather-induced bump in spending proved to be short-lived, as consumption growth has flat-lined over the past two months. Moving forward, we expect this to continue into the second quarter.

Inflation remains elevated as month-to-month movements in core inflation have failed to show a material shift downward, with the 3-month moving average holding at 0.4% in March. We expect that the Fed will opt to raise rates by 25 basis points at next week’s meeting before pausing to gauge the cumulative impact of policy tightening.