When the Commerce Department releases their monthly Personal Income Report tomorrow, it will help us understand how consumers and businesses are responding to an unpredictable economy: saving, spending, and sometimes both. Most economists expect that consumer spending will increase about 0.6% and that inflation will remain flat.
A strong labor market is crucial in uncertain times.
The 228,000 jobs added to the economy in March exceeded all expectations, bolstering hopes for wage growth. That growth is critical for the economy in its current state, as employers brace for the fallout from President Donald Trump’s tariffs, and after a slate of Federal layoffs. An increase in household incomes, combined with the encouraging job numbers from March, would suggest a sturdy labor market.
Consumers are willing to spend…
Economists expect that consumer spending saw a healthy increase of about 0.6% in March, up from a serious decline of -0.3% in January. As the biggest driver of the country’s economy, consumer spending contributes to about two-thirds of the nation’s GDP, and an increase in consumer spending would be a reassurance that the economy is strong.
…but they may just be hoping to get out in front of the tariffs.
The tepid consumer spending of the first two months of 2025 has economists worried that consumers are bracing for tough and unpredictable economic times ahead. Meanwhile, the strong sales numbers across sectors like retail and automotive paints a more optimistic picture. But some of that spending could be just a temporary boost as consumers purchase goods before international tariffs have a chance to run up prices.
Economic volatility causes people to save.
An increase in consumer spending is good, but economists will also be watching to see how much of their income Americans are taking to the bank. Increased savings rates are an indicator that households lack confidence in the future of the economy. The household savings rate also increased in the first two months of 2025, a trend that may have continued into March.
Inflation is cooling, but only for now.
The Personal Income report contains the most important number that the Fed will use as it weighs whether or not to cut rates on May 7th. While most economists believe that the Fed won’t cut their rates at this next meeting, if March showed no increase in inflation, that could make a rate cut in June more likely.