Economics
March 31, 2022
Economic Indicator
February marked the seventh straight month in which inflation outpaced income, raising doubts about consumer spending stamina. Yet, even with inflation at a 40-year high, the 0.4% drop in real spending in February might be overstating the burden and be more of a reflection of an upward revision that made January one of the best months on record for real spending.
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| Source: U.S Department of Commerce and Wells Fargo Economics |
Consumer spending edged only slightly higher in February, up 0.2%, but after adjusting for inflation, real spending actually fell 0.4% (chart). Inflation continues to be the top threat to consumer spending, and once again both the headline and core PCE deflators rose on a year-over-year basis to a pace not seen since the early 1980s. So is consumer spending being swamped by price growth? As with most things, some context is helpful.
The 0.4% drop in real spending in February comes on the heels of an already strong January gain that was revised much higher. In fact the 2.1% monthly jump in real PCE in January was the sixth largest increase in records going back more than 30 years (chart). Of the five months that beat the January increase, four of them were pandemic-related surges tied either to major reopening months or to stimulus payments.
Our best read is that consumers pulled forward their holiday spending last year in anticipation of widely publicized shortages which set up December to be a flop. The fact that this occurred against a backdrop of worsening inflation and because the seasonal adjustment process is looking for December to be the big month for spending, there is a lot of noise in these past few months. On balance, we expect consumer spending to slow sharply in the face of higher inflation and in the absence of income boosters like stimulus payments this year. But critically, we anticipate only a slowing not an outright retrenchment that the 0.4% headline decline in real consumer spending would otherwise indicate.
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| Source: U.S. Department of Commerce and Wells Fargo Economics |
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| Source: U.S. Department of Commerce and Wells Fargo Economics |
Personal income advanced largely as expected in February, rising 0.5% after an upwardly revised 0.1% gain the month prior. Wages and salaries continued to be the main driver of income growth, rising 0.8% last month, which is in-line with the average growth over the past six months. The tight labor market continues to bid up wages as businesses compete for talent, and solid gains in compensation have propped up income as fiscal support has ceased. That said, consumers' purchasing power remains under pressure as households continue to contend with higher prices.
Real disposable personal income slipped 0.2% in February, which marks the seventh consecutive monthly decline. As is clearly seen by the nearby chart, there has been a trend decline in real disposable income since the end of the fiscal backstop. Higher inflation has pushed real disposable income significantly below its pre-pandemic trend, and with inflation showing little signs of easing, this presents a growing concern for the spending outlook. A silver lining for the hit to spending is that it could eventually provide some needed relief on the inflation front. Soaring demand fueled by income windfalls last year are partly to blame for today's high inflation.
Diminished purchasing power will weigh on real spending. We do not wish to dismiss this risk, but we see some notable factors helping households today. Households are in decent financial shape and this should not be overlooked. Wage growth has been robust and shows few signs of slowing amid strong demand for labor. This is beneficial to households even if inflation is currently eating into much of the recent gain. More importantly, households can temporarily rely on their balance sheets. The personal saving rate rose to 6.3% last month, and since this was below the pre-pandemic rate of 7.8%, it implies a decline in 'excess' savings. We estimate there is still about $2.3 trillion in excess savings currently outstanding (chart), and while we've previously acknowledged all of this stashed cash is likely not sitting idly, we expect a decent chunk of it is at the disposable of households should they wish to rely on it. More simply, we expect households to save less in the near term to offset some of the hit to purchasing power from rising inflation. If they don't, spending could falter more than we presently forecast.
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| Source: U.S. Department of Commerce and Wells Fargo Economics |
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| Source: U.S. Department of Commerce and Wells Fargo Economics |
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Economics Group
Jay H. Bryson, Ph.D. | Chief Economist | 704-410-3274 | Jay.Bryson@wellsfargo.com |
Mark Vitner | Senior Economist | 704-410-3277 | Mark.Vitner@wellsfargo.com |
Sam Bullard | Senior Economist | 704-410-3280 | Sam.Bullard@wellsfargo.com |
Nick Bennenbroek | International Economist | 212-214-5636 | Nicholas.Bennenbroek@wellsfargo.com |
Tim Quinlan | Senior Economist | 704-410-3283 | Tim.Quinlan@wellsfargo.com |
Sarah House | Senior Economist | 704-410-3282 | Sarah.House@wellsfargo.com |
Azhar Iqbal | Econometrician | 212-214-2029 | Azhar.Iqbal@wellsfargo.com |
Charlie Dougherty | Economist | 212-214-8984 | Charles.Dougherty@wellsfargo.com |
Michael Pugliese | Economist | 212-214-5058 | Michael.D.Pugliese@wellsfargo.com |
Brendan McKenna | International Economist | 212-214-5637 | Brendan.Mckenna@wellsfargo.com |
Shannon Seery | Economist | 332-204-0693 | Shannon.Seery@wellsfargo.com |
Nicole Cervi | Economic Analyst | 704-410-3059 | Nicole.Cervi@wellsfargo.com |
Sara Cotsakis | Economic Analyst | 704-410-1437 | Sara.Cotsakis@wellsfargo.com |
Jessica Guo | Economic Analyst | 704-410-4405 | Jessica.Guo@wellsfargo.com |
Karl Vesely | Economic Analyst | 704-410-2911 | Karl.Vesely@wellsfargo.com |
Patrick Barley | Economic Analyst | 704-410-1232 | Patrick.Barley@wellsfargo.com |
Coren Burton | Administrative Assistant | 704-410-6010 | Coren.Burton@wellsfargo.com |
All estimates/forecasts are as of 3/31/2022 unless otherwise stated. 3/31/2022 9:58:28 EDT. This report is available on Bloomberg WFRE
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