- PCE inflation (both overall and core) was 0.3% in February. Inflation also slowed on a year-over-year basis in February but remains much higher than the Federal Reserve would like.
- Real after-tax personal income rose modestly in February, with a slight decline in real consumer spending. But real consumer spending was up sharply in January and will add to overall economic growth in the first quarter of 2023.
- PNC expects a mild recession in the second half of this year.
Both the overall and core (excluding food and energy) PCE price indices increased by 0.3% in February from January. This was a slowing from January when the overall PCE index rose 0.6% and the core PCE index rose 0.5%.
On a year-ago basis, overall PCE inflation was 5.0% in February, down from 5.3% in January and December. Core PCE inflation was 4.6% year-over-year in February, down from 4.7% in January. Inflation is slowing but remains well above the Federal Reserve’s 2% objective. PNC expects the Federal Open Market Committee to increase the fed funds rate by 25 basis points at its next meeting in early May, but the outlook is highly uncertain given the ongoing stresses in the financial system. The FOMC could decide to hold the fed funds rates steady if the problems in the banking system remain a concern.
PNC expects a mild recession starting sometime in the second half of 2023 as the accumulated drag of higher interests weighs on interest-rate sensitive industries like housing, consumer durable goods, and business investment.
After-tax personal income, adjusted for inflation, rose 0.2% in February, following a big 1.5% increase in January, due in part to the way tax payments were calculated.
Inflation-adjusted consumer spending fell 0.1% in February from January, but that followed a huge increase of 1.5% in January, revised higher from 1.1% growth.
Consumer spending in early 2023 is running well ahead of its pace in the fourth quarter of 2022. With consumer spending making up about two-thirds of the overall economy, this points to strong GDP growth in the first quarter of this year. In particular, income gains are supporting consumer spending growth. With continued job gains and solid wage growth, labor income continues to rise; it was up 0.3% (nominal) in February.
But although consumer spending growth is strong, it is set to fade over the course of 2023 as job growth slows and the drags from higher interest rates and declining household wealth increase.
Nominal personal income rose 0.3% in February, with after-tax nominal personal income up 0.5%. Nominal consumer spending increased by 0.2% in February. With after-tax income up more than spending, the personal saving rate rose to 4.6% in February, from 4.4% in December and January. The saving rate fell sharply in early 2022 as high inflation reduced the ability of households to save. But as inflation slowed households have been able to save a bit more, although the saving rate is lower than it was before the pandemic. Still, households have managed to hold onto a lot of savings they accumulated during the pandemic, which is another positive for near-term consumer spending growth.
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.
