U.S. Personal Income & Spending (February 2025)

U.S. Personal Income Continued to Rise Strongly, but Spending Disappointed in February

• Both personal income and spending rose in February. Personal income advanced by robust 0.8% month-over-month (m/m), which was stronger than consensus expectations for a 0.4% m/m gain. 
• Consumer spending increased by 0.4% on the month – an acceleration following a lackluster performance in January (revised to -0.3% m/m). Despite the rebound, February's outturn was softer than the market expectations for a 0.6% gain. With income outpacing spending last month, saving rate increased for the second consecutive month to 4.6% from 4.3% prior. 
• Most of the gain in spending was due to higher prices. In real terms (which excludes the impact of inflation) spending edged higher by just 0.1%. This tepid increase follows a -0.6% decline in January. Spending on goods rose 0.7%, with higher volumes of sale of both durable and non-durable items. Spending on services meanwhile edged down by 0.1% m/m.   
• Inflation heated up a bit. The Fed's preferred inflation metric, the core PCE price deflator, rose 0.4% m/m – a slight acceleration compared to 0.3% gain in January. In year-over-year terms, core PCE inflation rose to 2.8% from 2.7% in the prior month.

Key Implications

• Income continued to rise strongly in February but spending gains disappointed. Real consumer spending remained little changed in February following a pullback in January. Although income and employment growth have so far remained resilient, soft indicators such as consumer confidence are pointing to increasingly nervous consumers, anxious about inflation and economic uncertainty. Given the soft start to the year and a hit to consumer confidence, we expect real consumer spending to lose steam in Q1, expanding by less than 0.5% (annualized), compared to 4.2% in fourth quarter of 2024.
• Consumer confidence has fallen over the past four months, while one-year inflation expectations have surged to levels not seen since November 2022, when core PCE inflation exceeded 5% (compared to 2.8% now). Consumers have reasons to worry about prices. For example, tariffs on imported vehicles announced this week could raise the already-high vehicle prices by additional $5,000 on average (report). Spending at bars and restaurants has stagnated over the last three months, while the saving rate continued to edge higher in February, suggesting that consumers may already be cutting back on discretionary spending to conserve cash. This cautious approach may be warranted, as our latest forecast anticipates higher unemployment and inflation in the months ahead.