Consumer spending categories illustrated around U.S. currency. (Elena Abrazhevich)
Personal income likely rose again in February, but did little to strengthen purchasing power after inflation, according to economist estimates ahead of Thursday’s Personal Income and Outlays report from the U.S. Bureau of Economic Analysis. This release will show where consumers stand before the effects of the war with Iran begin to surface in the data.
Here are five things to watch for in Thursday’s report:
1. Consumer spending
Consumer spending is expected to increase modestly in February and be driven by services rather than discretionary goods. Last month, personal consumption expenditures increased 0.4%, with purchases concentrated in health care and utilities. When adjusted for inflation, tracking real personal consumption expenditures (PCE) offers a clearer picture of where the economy stands, as it accounts for roughly two-thirds of gross domestic product.
2. Real income growth
Wages are expected to increase slightly in February, at around 0.3%, roughly the same pace as January, according to Bloomberg estimates. While incomes have been rising month over month, when adjusted for inflation, gains have remained relatively flat. This means that households are not gaining much ground in the face of rising costs and fluctuations in the market. If income growth remains low, economists worry that inflation could begin to outpace wages.
3. Core inflation
Core PCE inflation, the Fed’s preferred inflation gauge, is not likely to grow faster than it has in January. The measure, which excludes food and energy prices, stood at 3.7% last month, increasing by an average of 0.3% over the past three months. If this trend continues, core inflation will trend closer to 5% next year, which is well over the Fed’s preferred target. Fed officials will keep a close eye on February’s report, but economists do not expect it to prompt near-term rate cuts.
4. Savings rate
The personal saving rate may decline in February, but only slightly, after Social Security payouts and transfer payments temporarily boosted household savings last month. The savings rate has changed little from a year ago, staying at around 4%, a level considered low by many economists. This suggests that Americans have less room to absorb higher prices and navigate economic uncertainty, something economists worry can slow consumer spending, which has remained the main driver of economic growth in recent years.
5. The broader picture
February’s PCE report is unlikely to shift the course of the Fed’s policy outlook or economists’ expectations for where the economy is headed. It is likely to show subdued wage growth and consumer momentum largely unchanged. Economists warn that Friday’s Consumer Price Index report could offset income gains in Thursday’s numbers if inflation ticks up as they expect it to. Furthermore, both reports reflect data before economic pressures from the war with Iran took hold, signaling February PCE numbers will have limited relevance when current inflationary pressures factor in.
“Rising energy prices will erode real disposable income, but there could be some offset from larger tax refunds given tax cuts legislated in 2025,” said David Sloan, senior economist at Continuum Economics.