PCE Data Release Indicates Slowing Consumer Participation in Economy
Encouraging data on inflation is the silver lining as demand falls
The Bureau of Economic Analysis released data on Personal Consumption Expenditures (PCE) for February this morning, which reveals signs of consumer participation in the economy slowing down.
Personal income increased by $72.9 billion (0.3%) and Disposable Personal Income (DPI) rose by $89.9 billion (0.5%). However, PCE only increased by $27.9 billion (0.2%), indicating that consumers are not spending their income as freely as before.
The PCE price index increased by 0.3%, with the exclusion of food and energy. Real DPI increased by 0.2% in February, while Real PCE decreased by 0.1%. Both goods and services experienced a decrease of 0.1% each. The increase in current-dollar personal income was primarily driven by a rise in compensation, particularly from wages and salaries.
On the positive side, the data shows that inflation is slowing, as indicated by the PCE price index increase of 0.3% in February, compared to 0.6% in January. This slowdown in inflation can be considered a positive development, as it can help in easing the pressure on consumers' purchasing power.
However, the decline in Real PCE and the decrease in spending on both goods and services suggest potential negative implications for economic growth. Decreased consumer spending can lead to slower economic expansion, as consumer spending is a significant driver of economic activity.
The $27.9 billion increase in current-dollar PCE in February can be attributed to a $25.8 billion rise in spending for services and a $2.0 billion increase in spending for goods. Within services, gains in housing and health care were partially offset by a decrease in food services and accommodations. For goods, increases in gasoline and other energy goods, as well as "other" nondurable goods, were partially offset by a decrease in motor vehicles and parts.
Today’s PCE release caused the Atlanta Fed GDPNow model to revise Q1 GDP growth lower to 2.5%.
From the Atlanta Fed: The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.5 percent on March 31, down from 3.2 percent on March 24. After recent releases from the US Census Bureau and the US Bureau of Economic Analysis, the nowcasts of first-quarter real personal consumption expenditures growth, first-quarter real gross private domestic investment growth, and first-quarter real government spending growth decreased from 5.0 percent, -7.0 percent, and 1.8 percent, respectively, to 4.6 percent, -7.3 percent, and 1.7 percent.
Overall, the PCE data release indicates a potential slowdown in consumer participation in the economy. While the slowing inflation may be a positive development, the possible negative impact on economic growth cannot be overlooked. As consumer spending is a critical component of economic growth, a continued decline in Real PCE could result in more significant challenges for the economy in the long run.