American consumers are still holding tightly to their wallets.
Consumer spending inched up by a meager 0.1 percent in March after an 0.2 percent gain in February, the Commerce Department reported Friday. Consumer spending accounts for 70 percent of all economic activity, one reason why the economy only grew by 0.5 percent during the first quarter of 2016 – its slowest expansion in two years.
Auto sales, a major spending category, fell by 0.6 percent in March, while purchases of nondurable goods like clothing rose by 0.6 percent. Spending on apartment rentals and utilities rose by 0.1 percent.
The personal savings rate spiked to 5.4 percent of after-tax income in March, as Americans socked away more money rather than spending on big-ticket items like cars. Total savings for the month totaled $735.5 billion, their highest since December 2012.
Consumers have remained hesitant to spend in recent months even though they have more money to do so. The Commerce Department reported that incomes rose by 0.4 percent last month . The job market has been firming for the past several months as businesses have expressed more confidence in hiring and retaining employees, which contributes to an increase in wages and incomes. Wages and salaries rose by 0.7 percent in March.
The firming labor market has been good news for the Fed, which monitors both domestic and international economic trends as it considers whether or not to raise interest rates. At its regular board meeting on Wednesday, the Fed determined that economic growth during the first months of the year justified leaving interest rates unchanged for the foreseeable future. Economists predict only one or two increases are likely for in the remainder of 2016.
Gross domestic product was also soft in March. The Commerce Department reports that the personal consumption expenditures (PCE) price index, which excludes food and energy, crept up 0.1 percent after the 0.2 percent increase seen in February. The PCE has been rising an average of 1.6 percent for the past 12 months. The Reserve uses the PCE as its primary inflation indicator; inflation has hovered below the Fed’s 2 percent target benchmark for the past four years.
Inflation and economic activity may be sluggish in the near term, but the Federal Reserve forecasts economic growth to rebound later in the year, with inflation moving back towards 2 percent and consumer spending resuming a more normal pace.
“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen,” the Reserve said in a press release.
Economists also forecast consumer caution about the economy to dial down as fears about plunging oil prices and a turbulent stock market begin to fade.
"The bottom line is that even though consumers may have been cautious in the first quarter of the year, they are likely to spring forward in the second quarter. Consumer spending still remains one of the bright spots in the economy," Chris G. Christopher, Jr., Director of Consumer Economics at IHS Global Insight, writes in an e-mailed comment to The Monitor.