By Lucia Mutikani
WASHINGTON (Reuters) – U.S. consumer spending was unchanged in March as an increase in outlays on services was offset by a decline goods, but persistent strength in underlying inflation pressures could see the Federal Reserve raising interest rates again next week.
Stubbornly high inflation was underscored by other data on Friday showing labor costs increasing solidly in the first quarter as a tight labor market continued to drive wage gains in the private sector. With the economy, however, shifting to lower gear, the anticipated rate hike next Wednesday will probably be the last in the current cycle.
Tighter credit conditions following recent financial market turmoil have added to the risks of a recession later this year. A fight to raise the federal government’s $31.4 trillion borrowing cap also poses a threat to the economy.
“Spending momentum observed at the start of the year is quickly evaporating as elevated prices strain household finances,” said Sofia Baig, economist at decision intelligence company Morning Consult. “However, core inflation remains too high, adding pressure for the Fed to continue raising rates at its next meeting in early May.”
The unchanged reading in consumer spending last month, reported by the Commerce Department, followed a downwardly revised 0.1% gain in February. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have increased 0.2% in February.
Spending on services rose 0.4%, driven by housing and utilities as well as healthcare. That followed a 0.2% advance in February. Goods outlays fell 0.6% as purchases of motor vehicles, mostly new light trucks, decreased. Lower gasoline prices also contributed to the decline in goods spending which followed a 0.2% drop in February.
Economists polled by Reuters had forecast consumer spending dipping 0.1%. The data was included in the advance gross domestic product report for the first quarter published on Thursday, which showed consumer spending surging at a 3.7% annualized rate that period after rising at a 1.0% pace in the October-December quarter.
The overall economy grew at a 1.1% pace as the acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year. The economy expanded at a 2.6% rate in the fourth quarter.
Last month’s flat reading in consumer spending set consumption and the overall economy on a lower growth path in the second quarter.
Consumer spending is plateauing likely as Americans become more averse to higher prices. Social benefits are also dwindling. A temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits authorized by the U.S. Congress to cushion low-income people and families against the hardships of the COVID-19 pandemic expired in March.
SNAP is commonly known as food stamps. Researchers from the Commerce Department’s Census Bureau on Thursday estimated the end of the extra benefits had resulted in roughly 32 million people getting smaller monthly SNAP payments. They estimated that a household of four with a net monthly income of $2,000 was now getting $600 less in food stamps each month.
U.S. stocks opened lower. The dollar gained versus a basket of currencies. U.S. Treasury prices rose.
SOLID WAGE GAINS
The Fed is expected to increase interest rates by another 25 basis points next week, potentially the last hike in the U.S. central bank’s fastest monetary policy tightening cycle since the 1980s. The Fed has raised its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75%-5.00% range.
Though inflation is gradually slowing it remains elevated. The personal consumption expenditures (PCE) price index gained 0.1% in March, the smallest increase since last July, after rising 0.3% in February. In the 12 months through March, the PCE price index increased 4.2%. That was the smallest advance since May 2021 and followed a 5.1% rise in February.
Excluding the volatile food and energy components, the PCE price index rose 0.3%, matching February’s gain. The so-called core PCE price index gained 4.6% on a year-on-year basis in March after rising 4.7% in February. The Fed tracks the PCE price indexes for its 2% inflation target.
A separate report from the Labor Department on Friday showed its Employment Cost Index, the broadest measure of labor costs, rose 1.2% in the first quarter after increasing 1.1% in the October-December period. They increased 4.8% on a year-on-year basis after advancing 5.1% in the fourth quarter.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, because it adjusts for composition and job-quality changes. There were 1.7 job openings for every unemployment person in February.
Wages and salaries increased 1.2% last quarter after rising by the same margin in the fourth quarter. They were up 5.0% year-on-year after rising 5.1% in the prior quarter. Private sector wages increased 1.2%, matching the fourth quarter’s gain. They advanced 5.1% year-on-year.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
