February’s Personal Income & Spending Research Notes

by Jim Baird on March 30, 2012

February spending growth best in seven months; income edges higher

Personal income grew by 0.2% in February, a result that was slightly weaker than expectations.

While income growth showed limited improvement, personal spending rose by a considerable 0.8% during February, its strongest showing in seven months.  Strong auto sales provided a meaningful boost, as the pace of spending growth doubled its January rate.

The negative impact of rising costs is still being felt by consumers, particularly with income growth still lackluster.  If sustained, the recent elevation in the price of gasoline in particular could prove problematic by taking a bite out of discretionary spending in the months ahead.

We expect income growth will remain muted given the large pool of available workers still seeking employment.  Nonetheless, wage pressures could become more of an issue sooner than some expect in regions of the country that are experiencing stronger growth.  Even with heightened unemployment, competition for skilled workers could intensify and drive some acceleration in wage growth in certain industries in which the availability of qualified workers is more limited.

Today’s reports reinforce the sense that consumers have ramped up their spending a bit in recent months as improvements in labor market conditions have boosted confidence.  Nonetheless, that increased spending continues to outpace income growth, requiring consumers to reduce their savings to fund purchases.  This is likely to provide a near-term boost to the economy, but smacks of a return to pre-recession consumer habits.  While it’s too early to sound an alarm, should consumers stray too far back toward the “borrow to spend” today approach, the gradual progress that has been made in reducing household debt and increasing savings could stall out.  Ultimately, the economy would be on a better footing if spending growth were accompanied by comparable improvement in household income.

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