Personal consumer expenditure (PCE) rose a minimal 0.1% in February which was in line with market expectations. This represented a slowing in growth from the 0.4% gain achieved in January. The minimal gain in spending occurred despite an unexpected jump in growth in income in February to 0.5% which was up from the 0.3% gain recorded in January. With income growth outstripping the rise in spending, the savings rate managed to return to positive territory rising to 0.3% from -0.1% in January. Consumer spending on a volumes basis remained unchanged in the month following a negligible 0.1% gain in January.
The modest overall gain in nominal consumer spending largely reflected weakness in the nondurables component which fell 0.2% in February. Greater strength was evident in the purchase of durables and services which both rose 0.3% in the month.
Overall personal consumer expenditure (PCE) prices were up a minimal 0.1% in the month as was the core, or ex food and energy, component. On a year-over-year basis, the overall measure continues to rise at an elevated 3.4% due to earlier gains in energy prices though this does represent a modest easing from the 3.5% recorded in January. The annual increase in core prices is rising a much more moderate 2.0%, which came in slightly under market expectations and was unchanged from the downwardly revised increase in January. The increase in core prices still remains at the upper end of the Fed's so-called “1% to 2% comfort zone.”
Despite the volume of PCE remaining unchanged in February after rising only 0.1% in January, earlier increases have still left the level of spending up an annualized ½% relative to the fourth quarter. This does reinforce the expectation that consumer spending likely slowed from the 1.9% recorded in Q4 though growth does appear likely to have remained in positive territory. With housing expected to continue to subtract almost a full percentage point from quarterly growth over the first half of the year, growth in other key expenditure areas like consumer spending and business investment will need to remain in positive territory to minimize the negative hit to overall GDP. Thus the Fed is expected to continue to try and ease the pressures in financial markets that are currently pressuring the cost of capital higher and weighing on consumer confidence. The response by policymakers will likely entail both measures to deal with illiquidity in specific asset market along further interest rate reductions. Our forecast assumes that Fed funds will be cut a further 75 basis points over the next two FOMC meeting dropping to a near-term trough of 1.50% by mid-2008.
RBC Financial Group
http://www.rbc.com
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
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