Personal income and spending February 2025

Cloudy consumer outlook

The latest consumer health check revealed consumers are increasingly apprehensive about spending amid sticky inflation trends and pre-emptive inflation anxiety (PIA) from tariffs, flagging consumer sentiment and rising job insecurity. Consumer spending increased 0.4% in nominal terms in February, but after adjusting for another robust monthly increase in prices, real outlays only rose 0.1% as consumers cut back on dining out and hotel stays. The latest figures, along with downward revisions to the prior months’ data, point to flat real consumer spending in Q1 and mildly negative real GDP growth in Q1.

• While personal income increased 0.8% month over month (m/m) in February on moderate wage gains and strong transfer receipts, personal outlays rose a more moderate 0.4% m/m, and real outlays rose a mere 0.1% m/m following a 0.6% contraction. As a result, the personal savings rate rose 0.3 percentage point (ppt) to 4.6%, its highest level since June 2024. The recent uptrend is noteworthy as it could indicate the onset of a precautionary savings by households amid heightened policy and economic uncertainty. 
   
• Higher inflation took a bite out of households’ income in February so that real disposable income rose 0.5%. While consumer spending remains on a firm 2.7% year-over-year (y/y) trend, its main pillar has softened. Real disposable income rose 0.5ppt to a modest 1.8% y/y in February, after reaching its weakest pace since December 2022. 
   
• On the inflation front, while the headline personal consumption expenditures (PCE) deflator rose 0.3% m/m – in line with expectations – the core PCE index surprised to the upside with a 0.4% m/m increase compared to consensus expectations for a 0.3% gain. Headline PCE inflation remained steady at 2.5% y/y while core inflation ticked 0.1ppt higher to 2.8% y/y from an upwardly revised 2.7% y/y pace in January. Short-term inflation dynamics showed renewed momentum with the three-month and six-month annualized core PCE inflation gauges at 3.6% and 3.1%, respectively. Looking ahead, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are tilted to the upside.
   
• Looking into the spending details, inflation-adjusted spending on durable goods jumped 1.0%, only partially recovering from the 4.6% decline in January. The gain was broad-based with stronger outlays on autos (+1.6%), recreational vehicles (+1.0%), and furniture and furnishings (+0.7%). Outlays on nondurable goods rose 0.5%, also only partially reversing January’s 0.8% decline. Strong grocery purchases (+0.7%) led the gain while spending on clothing and gas fell. Meanwhile, services outlays disappointed with a 0.1% drop, the first decline in services outlays since January 2022. The pullback mostly reflected a large drop in spending at restaurants and hotels (-1.4%) and lower spending on utilities (-0.2%). 
   
• While consumer fundamentals remain healthy, PIA appears to be weighing on consumer morale and their willingness to spend, with sentiment gauges plunging and inflation expectations rising. Looking ahead, we foresee real consumer spending growth of 2.2% in 2025, following a 2.8% advance in 2024. The average will mask a more pronounced moderation in spending trends, with consumption momentum likely to ease from 3.1% y/y in Q4 2024 toward 1.3% y/y in Q4 2025.
   
• Overall, the US economy is poised to slow down this year with growth likely around 1.7% following average growth of 2.8% in 2024, reflecting softening private sector demand. We continue to anticipate two 25 basis point rate cuts in 2025, in June and December. However, a reactionary monetary policy stance means policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish with hotter inflation and inflation expectations readings.