• Real consumer spending was flat in March, while real after-tax income rose 0.3%.
• Inflation slowed in March but remains too high for the Federal Reserve.
• PNC expects a 25 basis point increase in the fed funds rate next week.
• PNC’s baseline forecast is for a mild recession starting in the second half of this year.

Results for consumers were mixed in March. Inflation-adjusted consumer spending was flat in March from February after declining 0.2% in February (revised from a 0.1% decline), even as real after-tax household income rose 0.3% in March. Real consumer spending jumped 1.4% in January, so real household spending was still up sharply for the first quarter as a whole (up 8.0% on an annualized basis).

The PCE price index rose 0.1% in March from February, the lowest monthly inflation since prices fell last July, with the core index (excluding food and energy prices) up 0.3%.

On a year-ago basis, overall PCE inflation slowed to 4.2% in March from 5.1% in February; most of the big drop came from base effects as prices soared in March 2022 following the Russian invasion of Ukraine. But year-over-year core PCE inflation, which matters more for Federal Reserve policy, slowed only slightly, to 4.6% in March from 4.7% in February. This remains far above the Federal Reserve’s 2% objective and will support a 25 basis point increase in the Fed funds rate when the Federal Open Market Committee meets next week. Overall PCE inflation peaked at 7% in mid-2022, while core PCE inflation peaked at above 5% in early 2022.

There are still many positives for consumer spending. In particular, the labor market remains very strong: nominal (not adjusted for inflation) labor market income rose 0.3% in March from February thanks to job growth and wage gains. But nominal spending on goods has fallen for two straight months (down 0.6% in March), due to less need for buying after very strong goods purchases in the aftermath of the pandemic, higher prices, and higher interest rates. Services spending growth remains strong, with a 0.4% nominal increase in March, as households make up for missed spending opportunities during the pandemic.

But the drivers for consumer spending are fading. Job growth and wage gains are slowing, higher interest rates are a drag, inflation remains high, household wealth is down due to drops in the stock market and home values, and a slowing housing market is weighing on purchases of home-related goods and services. With consumer spending accounting for about two-thirds of the U.S. economy, PNC expects consumer spending to decline in the second half of this year, primarily on the goods side, and the U.S. economy to enter into a mild recession. The economy should start to pick up in the first half of 2024 as the Federal Reserve cuts interest rates as inflation slows in the wake of the recession, supporting a recovery.

Nominal after-tax income rose 0.3% in March from February, with nominal consumer spending flat. With income up more than spending the personal saving rate rose to 5.1% in March from 4.8% in February and was up from a low of around 3% in the summer of 2022. Households had been running down their savings last summer as high inflation took a bite out of their pocketbooks. But with inflation slowing, they are now saving somewhat more; this is another drag on consumer spending.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.