This past month, American consumers increased their spending at the fastest rate since January 2023.
Consumer spending rose 0.8% in February, the Bureau of Economic Analysis said Friday.
Personal incomes rose at a monthly rate of .3%, which may have given consumers the confidence to spend more than usual. However, it also means people are saving less, with the savings rate at just 3.6% in February. Personal Consumption Expenditure, excluding food and energy, lowered slightly to 2.8%.
The inflation rate was up .3% compared to the previous month, which could make the Fed more cautious about when to ease interest rates. Economists at Wells Fargo are predicting that they will start to ease in June and July, but that the Fed may avoid making significant cuts since inflation is likely to decrease as the year progresses.
There is still a clear preference for services rather than goods, which means the prices of services can continue to rise as a result of such high demand. Long gone are the trends of the pandemic days, when there was a major surge in the purchase of goods amidst a rampant shutdown of services. Consumption of goods rose .1% in February and purchase of services rose .6%, according to the Bureau of Economic Analysis.
Although spending is rising overall, there are signs that consumers are becoming more cautious with their disposable income. Households are spending more on non-discretionary items such as food and gas, and not necessarily splurging on one-off expensive purchases that weren’t in the budget. “Inflation is slowing, but households are still dealing with higher prices generally,” said Shannon Grein, an economist at Wells Fargo. “The labor market is showing some signs of moderation and that is causing consumers to be a bit more choosy in terms of their spending habits.”
This rings true for Marie-Pearl Akosua, 25, who works at a Target shopping center in Brandywine, Southern Maryland. She often gets stationed alternately at the Starbucks outlet, the Pizza Hut outlet or the retail store itself, and has noticed prices rising across all three posts. Lately, she decided she could no longer afford to buy herself a drink from Starbucks during her breaks.
“I also stopped buying Pizza Hut for lunch so much, I would pack food instead,” she said. “Whenever I forget to pack food I just don’t eat, rather than buy something.”
Akosua is trying to save more these days, and the bulk of her disposable income is spent on groceries and food. To avoid paying too much for services, she makes agreements with her friends to do each other’s hair and nails.
While the February report shows stronger economic growth through continued spending in the short term, there needs to be a marked improvement in consumer’s saving habits. A strong labor market and continued income growth could boost morale, but the savvy consumer knows it’s not a reason to throw caution to the wind by overextending their budget and shrinking their savings.
