U.S. consumer spending rose moderately in February and momentum is set to fade rapidly in the coming months, with the coronavirus pandemic upending life for Americans.
The highly contagious virus, which causes a respiratory illness called COVID-19, is wreaking havoc on the economy, prompting the Federal Reserve to take extraordinary measures and the U.S. Congress to assemble a record $2 trillion stimulus. Economists say the economy is already in recession.
The government reported on Thursday that the number of Americans filing for unemployment benefits rocketed to a record 3.28 million last week, eclipsing the previous record of 695,000 set in 1982.
"Social distancing measures taken in response to the fast-spreading coronavirus along with extreme financial market volatility will take a severe toll on the main engine of economic growth," said Lydia Boussour, a senior U.S. economist at Oxford Economics in New York.
The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% last month as households spent more on electricity and gas, offsetting decreases in outlays on motor vehicles and parts as well as recreational goods.
Last month's increase matched the gain in January and was in line with economists' expectations.
The United States now has the most coronavirus cases in the world, with more than 82,000. Governors in more than half of the nation's 50 states have ordered residents to stay mostly indoors, affecting over 100 million people.
Restaurants and bars have been shuttered, and airline travel severely curtailed, which economists say will greatly offset any boost to consumer spending from grocery purchases following a wave of panic buying as Americans prepared to hunker down.
When adjusted for inflation, consumer spending edged up 0.1% for a third straight month in February.
U.S. financial markets were little moved by data.
With "social distancing" measures to contain the virus throwing millions out of work and severely curtailing discretionary spending, economists are predicting a moderate decline in consumer spending in the first quarter, which would give way to a sharper contraction in the second quarter.
"Even if sales made from consumers' smartphones are ringing off the hook, it won't offset for the closure of the shops and malls across much of America done to fight the spread of this deadly disease," said Chris Rupkey, chief economist at MUFG in New York.
Consumer spending grew at a 1.8% annualized rate in the fourth quarter, slowing from the brisk 3.2% pace logged in the July-September period.
Labor market strength, which was driving a steady pace of wage growth, was the economy's main pillar of support. In February, personal income increased 0.6%, matching January's rise. Income was boosted by higher wages and government payments to farmers caught in the 20-month long U.S.-China trade war.
Wages advanced 0.5% last month. Income, excluding government subsidies, will be closely watched for clues on the magnitude of the anticipated economic downturn.
Income is one of the four monthly indicators tracked by the National Bureau of Economic Research, the prestigious private research institute that is regarded as the arbiter of U.S. recessions. The NBER does not define a recession as two consecutive quarters of decline in real gross domestic product, as is the rule of thumb in many countries.
Instead, it looks for a decline in economic activity, spread across the economy and lasting more than a few months.
"The current crisis means change is afoot," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "A record-shattering increase in jobless claims suggests that transfer payments will likely be the only facet of income rising in the months ahead."
With income growth outpacing spending, savings increased to $1.38 trillion in February, the highest in a year, from $1.32 trillion in January.
Inflation remained moderate in February. Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.1% for a second straight month in February. The PCE price index was curbed by a 2.1% drop in the cost of energy goods and services, which partially offset a 0.4% gain in food prices. In the 12 months through February, the PCE price index advanced 1.8%, matching the gain in January.
Excluding the volatile food and energy components, the PCE price index rose 0.2% for a third straight month in February. That lifted the annual increase in the so-called core PCE price index to 1.8% in February, the biggest gain since August, from 1.7% in January.
The core PCE index is the Fed's preferred inflation measure. It missed the central bank's 2% target in 2019.