Spending by consumers increased significantly in March as Americans hastened purchases to avoid potential price hikes due to tariffs
In a whirlwind of spending, fueled by anxiety over potential tariffs, consumer expenditure surged by 0.7% in March - a jump not seen in over two years, according to fresh data released by the Commerce Department. This sudden spike was primarily driven by a massive increase in purchases of durable goods, with automobiles leading the pack.
The Commerce Department's Personal Income and Outlays report, shedding light on spending, income, and the Federal Reserve's preferred inflation gauge, further confirmed the recent retail sales data and anecdotal evidence: American consumers are upping their spending game and rushing to make purchases before the feared tariff-induced price hikes kick in.
However, while the tariffs were held in check for the month of March, overall inflation slowed down to its lowest rate since September. This decline was partially due to recession fears weighing down oil prices.
The Personal Consumption Expenditures price index, the Fed's preferred inflation gauge, climbed 2.3% year-on-year in March, albeit slower than February's 2.7% surge. Month-on-month, prices remained steady, contrasting February's 0.4% rise.
Economists had expected the PCE price index to cool substantially to a 2.2% annual rate in March, mostly due to descending energy costs as oil prices slumped due to reduced demand expectations. Energy prices indeed decreased by 2.7% in March, but food prices saw an unexpected jump of 0.5% from the preceding month.
Excluding food and energy costs, the core PCE price index remained unchanged for the month and slowed down to a 2.6% annual rate from 3%. In any other scenario, this inflation rate approaching 2% would likely stir optimism about the Fed reducing interest rates.
However, Trump's economy-shaking policy decisions, including the ensuing trade war with China, have put the central bank in a tight spot by slowing economic growth while driving inflation higher. This predicament creates a dilemma for the Fed policymakers, as inflation, though above the central bank's 2% objective, might start to soften the labor market, potentially conflicting with their goals.
The April jobs report is scheduled for release on Friday and is expected to reveal a softening in employment gains, although the labor market is predicted to remain relatively stable. On the other hand, Wednesday's other major economic data releases could signal challenges for the following months: The first quarter saw a contraction of economic activity for the first time in three years, amid a surge of imports, and a separate report on private-sector hiring indicated a significant drop-off in job gains.
On the bright side, the report shows that the economy is managing to hold its ground for now, with consumer spending rising by 0.7% from February. The increasing personal incomes, which jumped by 0.5% in March, bodes well for continued consumer spending. Consumers didn't save as much in March as they did in February, yet the personal saving rate stands at a healthy 3.9%.
All in all, this economic data release, though positive for the moment, serves as a "calm before the storm," as it may help insulate us against the impact of tariffs, product scarcity, and potential layoffs in the coming months.
- The rising consumption in March, according to the Commerce Department's report, is a direct result of Americans hastily making purchases due to the perceived tariff-induced price hikes in the near future.
- Despite the overall inflation slowing down in March, the Personal Consumption Expenditures price index still climbed 2.3% year-on-year, a figure which, in a different context, might have sparked optimism about interest rate reduction.
- The surge in consumer expenditure combined with the increase in personal incomes, though not accompanied by substantial savings, indicates a resilient economy for now, potentially providing a buffer against the predicted impacts of tariffs, product scarcity, and potential layoffs in the coming months.
