Income, Spending Drops in February Sans Stimulus

Young woman shopping in a grocery store and wearing protective medical mask
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U.S. consumers made, saved, and spent less money last month, in what analysts say is likely to be a brief pause in the economy’s stimulus-fueled growth spurt.

Personal income dropped 7.1% in February, according to data released by the Bureau of Economic Analysis (BEA) Friday, roughly in line with the 7.2% expected by Moody’s Analytics and the 7.3% median forecast of economists cited by Moody’s. The personal saving rate, at 13.6%, was down 6.2 percentage points from January, while disposable income fell 8%. Consumer spending dropped by 1% in February, the third decline in four months.

The decreases show the waning power of the $600 stimulus checks approved late last year, which sent income, saving, and spending soaring in January. It is now a waiting game to see the full effect of March’s $1,400 stimulus checks on both spending and income, even as early returns already have some institutions adjusting their rosy projections for the economy even higher.

Government aid, like the stimulus payments and federal unemployment insurance supplement, could add an additional $2 trillion to disposable personal income in the first quarter of 2021, Moody’s Analytics associate economist Matt Colyar wrote in a commentary.

“Armed with a much larger round of stimulus payments… and inoculations, shoppers are storming the stores as we speak,” wrote Sal Guatieri, BMO Capital Markets senior economist, in an online commentary. “Look for a massive rebound in March spending.”

The flip side is that inflation is sure to grow right along with spending and income. The Federal Reserve’s preferred measure for inflation, the core PCE index, compares numbers year-over-year, and has been bouncing between 1.3% and 1.5% since last July, below the Fed’s 2% target.

But economists say inflation—which eats into the purchasing power of each dollar—will likely jump up sharply in the next two months due to large declines last March and April caused by pandemic-related shutdowns. This core rate stayed tame in February, according to Friday’s BEA report, falling slightly to 1.4%.

The Fed has said it is comfortable with inflation “moderately above” its target as the economy recovers from the pandemic. February’s numbers will likely reassure the Fed that its so-called “easy-money” policy hasn’t added too much fuel to the economy. 

“While inflation is unavoidable, it won’t be uncontrollable,” wrote Gregory Daco, chief U.S. economist at Oxford Economics, in a commentary. Oxford Economics projects core PCE inflation will be around 2.5% by April.