U.S. consumer spending growth slowed sharply and inflation eased in February, the government said on Friday in a report suggesting the Federal Reserve’s long campaign of interest rate increases may soon be over.
Separate reports showed U.S. consumer sentiment and Midwest business activity rose more than expected in March, but new orders at U.S. factories came in below forecast in February, sending slightly mixed signals about the overall economy.
Economists said the fact that consumers increased spending even a little bit in February after a blockbuster January boded well for strong economic growth in the first quarter, especially since sentiment was strong and inflation tame.
“The trajectory of real consumption in the first quarter is very robust -- we estimate 5.0 percent annualized real consumer spending growth for the quarter,” said Peter Kretzmer, senior economist at Bank of America.
The Commerce Department said consumer spending rose 0.1 percent in February, above market expectations for an unchanged reading after January’s warm-weather shopping spree boosted spending by 0.8 percent. Personal income climbed 0.3 percent, just below Wall Street forecasts for a 0.4 percent rise.
Inflation slowed. The price index for consumer spending was up 2.9 percent in February from a year earlier, slowing from January’s 3.1 percent increase. When volatile food and energy costs are stripped out, the increase in the so-called core PCE price index -- the inflation gauge favored by the Fed -- was steady at a 1.8 percent.
“As far as inflation goes, this was as good as you could possibly get,” said Joel Naroff, chief economist at Naroff Economic Advisors.
U.S. Treasury debt prices rose on the benign inflation report but were later mixed as the March spike in Midwest manufacturing was offset by the weaker-than-expected factory orders in February. The dollar rose and stock markets were higher.
One more rate hike?
Policy-makers at the central bank raised benchmark interest rates on Tuesday for the 15th straight time since mid-2004 in a bid to head off inflation pressures. Most analysts expect one more rate increase in May before the Fed retires to the sidelines to gauge the impact of the higher borrowing costs.
The scant 0.1 percent increase in consumer spending was the weakest since August 2005, but had been expected.
“There are not a lot of surprises here. We knew February will be a down month in spending after a torrid January due to mild weather. This is exactly what we got,” said Richard DeKaser, chief economist at National City Corp in Cleveland, Ohio.
The saving rate was negative for the fourth straight month, at minus 0.5 percent, meaning Americans spent all of their income and more in February, either by borrowing or cashing in savings. The saving rate has not been positive since March 2005.
A report by the University of Michigan suggested spending may continue, with its final March index of consumer sentiment rising to 88.9 from 86.7 in February. Economists had expected the index to rise more modestly to 87.0, and said the strong showing confirmed an upbeat reading of consumer confidence from The Conference Board earlier in the week.
“The labor market has been strengthening for a while, but it may be that people are finally starting to become believers in it,” said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.
A third report showed business activity in the U.S. Midwest expanded in March at a faster rate than expected. The National Association of Purchasing Management-Chicago business barometer rose to 60.4 from 54.9 in February, above forecasts for an increase to 57.0.
But the Commerce Department said new orders at U.S. factories rose a smaller-than-expected 0.2 percent in February, as robust civilian aircraft and defense capital goods orders outweighed declining demand for primary and fabricated metals, machinery and electrical equipment.
Analysts polled by Reuters were expecting factory orders to rise 1.4 percent.