Although personal income barely budged in March, consumer spending rose and a key inflation metric was flat — good news for the market as well as for ordinary Americans.
Monthly personal income and expenditure data for March from the Bureau of Economic Analysis found that personal income ticked up a mere 0.1 percent, below what analysts had projected, but spending jumped a higher-than-expected 0.9 percent.
“Spending was way up, which is a continuing trend for the first quarter. It seems that consumers are completely comfortable with increasing their spending through 2019, despite the rough end of 2018,” said Jamie Cox, managing partner at Harris Financial Group.
Economists worried that the December market volatility would derail the consumer spending engine that powers the economy. These figures are a relief in that they point to the resilience of consumer activity.
“The consumption number confirms that the consumer is in good shape,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute. “Income is growing at a fast enough pace to drive healthy levels of consumption.”
Despite the increase in consumption, inflation remains muted. The personal consumption expenditures price index increased by 0.2 percent for March, while the core PCE price index, a consumption figure that takes out the more volatile food and energy costs, was flat for March, and up 1.6 percent from a year ago.
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“There’s plenty of capacity, there’s plenty of goods available, and while there’s been an uptick in wages, it’s not that meaningful yet,” Samana said.
Economists say it also assuages any market concerns that the Federal Reserve, which meets this week, might re-evaluate the idea of higher interest rates.
“Three straight months with very small core PCE readings… will not go unnoticed at the Fed,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a client research note Monday. “If the Fed hikes this year, it will be because of accelerating wages, not the inflation rate at the time.”
“What most of the street is looking for is clues whether or not the data is running hot, which would potentially bring the Fed back into play. That’s not the case yet,” Cox said.
The continued low-inflation environment in an economy with near-full employment is still an economic puzzle, but experts theorize that the combination of retiring Baby Boomers and a mismatch between the skills workers have and the ones employers need has led to companies' hiring people with lower productivity at lower wages.
“The older, more highly compensated workers are leaving the workforce,” Samana said. Other factors helping to keep companies’ production costs down could be globalization and automation, he added.
“Employers can’t find the people with the right skills, so they have to hire at unskilled wages and train them. You also have people coming into the workforce that may have been out of the workforce for a while without the right skills and lower productivity,” said Dan North, chief economist at Euler Hermes North America.
This strong showing for the first quarter will create momentum for future economic growth, economists said.
“Even if spending corrects sharply in April — auto sales appear to have fallen back after an unexpectedly big March increase — we still expect 2-plus-percent for the quarter, up from 1.2 percent,” Shepherdson said.
“It’s a good report for people who are working, and a good report for the stock market because people are spending,” Cox said. “This is sort of a best-of-both-worlds report.”