Personal income and spending February 2024

Consumer spending on track for moderate Q1 growth

  • The latest consumer health check revealed that consumers remain willing to spend on goods and services despite cost fatigue, but moderating income growth points to softer spending momentum ahead. Consumer spending rose 0.8% in nominal terms in February, but after adjusting for another robust monthly increase in prices, real spending rose 0.4%.
  • The latest spending figures, along with downward revisions to the prior months’ data, point to moderate consumer spending growth of around 2.2% in Q1. With employment and household income growth softening, costs remaining elevated and interest rates likely to ease only gradually, we expect households will continue to exercise more scrutiny with their spending. Consumer spending should grow a more modest but still respectable 2.0% in 2024. 
  • The latest personal consumption expenditures (PCE) inflation data confirmed the disinflation path remains bumpy, though the notable cooldown in “supercore” PCE inflation was encouraging. Slower consumer demand growth, increasing price sensitivity, declining rent inflation, moderating wage growth and tight monetary policy continue to form the ideal combo for further disinflationary momentum in 2024. We see core PCE inflation ending the year around 2.4% year over year (y/y).

  • With Federal Reserve officials willing to look through the “noisy” January and February inflation data and reiterating it will be appropriate to start easing policy “at some point this year,” we continue to expect the onset of the Fed easing cycle in June and believe the Fed is likely to proceed with three rate cuts in 2024. However, we acknowledge the risk that further inflation stickiness and/or additional upside surprises in inflation prints could lead the Federal Reserve to maintain interest rates higher for longer or cut interest rates by less than anticipated.

Consumers reopened their wallet. Real personal outlays climbed 0.4% month over month (m/m) in February following a 0.2% contraction. 


o Real durable goods outlays rebounded 1.2% after falling sharply in January, with the gain mostly driven by stronger outlays on motor vehicles, which reversed part of their January plunge and rose 3.8%. Spending on furnishings and household equipment rose a modest 0.4% while spending on recreational goods fell 1.1%. 


o Real spending on nondurable goods declined by 0.6% as consumers spent less on gas (-2.9%) amid higher prices at the pump. They also spent less on clothing (-1.5%) and groceries (-0.2%). 


o Services outlays picked up markedly with a 0.6% gain, the strongest since July 2021. Households spent more on transportation (+2.6%), financial services and insurance (+1.1%), recreation services (+0.9%), and restaurants and bars (+0.4%).


Unwinding the January surge in income. Personal income rose a modest 0.3% in February as the one-off factors that boosted income in January – strong dividend income and the annual bump in Social Security benefits – faded. The 0.8% increase in wages and salaries was the largest gain in a year, a sign that resilient labor market conditions continue to underpin income growth and are helping consumers maintain solid spending levels. However, the strength in wages and salaries was offset by a sharp decline in dividend income, down 3.7%, while Social Security benefits reverted to a modest trend.


Higher taxes took a bite out of this income so that disposable income rose 0.2%. Importantly, inflation eroded purchasing power last month as real disposable income declined by 0.1%. The soft February print translated into a notable slowdown in the annual pace of real disposable income to 1.7% y/y – its slowest pace since December 2022.


Not saving much. With spending outpacing income, the personal savings rate fell by 0.5 percentage points (ppt) to 3.6% in February, a 14-month low. The savings rate remains well below the pre-pandemic average of 7.4% in 2019. This is a gauge to monitor closely and a sign that some consumers may be stretching their finances, especially lower-income households feeling the pinch of inflation and higher interest rates.


Bumpy but cooling inflation. The downside surprise from the headline PCE index in February, which rose 0.3% compared to consensus expectations for a 0.4% gain, was offset by upward revisions to the prior month. Meanwhile, the core PCE deflator also rose 0.3% m/m, in line with expectations, while the January monthly increase was revised higher to 0.5%. 


This lifted headline PCE inflation 0.1ppt higher to 2.5% y/y while core inflation eased 0.1ppt to 2.8% in February — the slowest pace since March 2021. Encouragingly, core services inflation excluding housing, which is the Fed’s preferred inflation gauge, cooled markedly to 0.2% m/m following a 0.7% increase in January. On an annual basis, supercore inflation eased 0.2ppt to 3.3% y/y but maintained an elevated 4.5% pace on a 3-month annualized basis.


On track for a June cut. As we look ahead, there is no doubt that the disinflationary process will remain bumpy, and there will be monthly readings that surprise to the upside. Insurance cost inflation, rising home prices and geopolitical risks are certainly worth monitoring carefully. But slower consumer demand growth, increasing price sensitivity, declining rent inflation, moderating wage growth and tight monetary policy form the ideal combo for further disinflationary momentum in 2024. 


We continue to expect the onset of the Fed easing cycle in June and believe the Fed is more likely to proceed with three rate cuts in 2024, rather than four as we had previously anticipated.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.