Consumer Spending Momentum Retreated in February (Report Preview)

This memo offers a preview of Morning Consult’s March U.S. Consumer Spending & Inflation Report. Morning Consult Economic Intelligence subscribers can access the full report here.

Spending growth softened in February, showing signs of easing momentum compared with the first month of the year. Following recent improvement in incomes and savings, household finances look to be facing tightening pressures: Consumers are taking on more credit card debt and reporting greater difficulty saving as wage growth cools and inflation looks stickier.

Consumers’ are still spending, but purchasing momentum is fading

Consumer purchases expanded in February, but softer retail sales and slower spending growth suggest momentum is already fading after the January jump in outlays. The overall increase indicates some residual strength in consumer budgets. Certain categories, like services, continue to show strong growth year on year, suggesting personal consumption expenditures might hold up better than retail categories. 

However, expansion in certain categories came at the cost of others. For instance, growth in grocery spending corresponded with a decline in restaurant outlays as consumers traded down to more affordable meal options. Larger purchases, such as housing and autos, had lower levels of real spending as interest rates weighed on prices and consumers sought opportunities to ease cost burdens on major expenses.

Recent improvements in household finances may soon reverse

Renewed signs that cracks may be forming in household finances help explain the gradual easing in spending momentum. Several months of improving incomes and savings have supported spending growth in early 2023, as described in last month’s report. However, relative to a year ago, consumers in February had a harder time adding to savings, and credit utilization looks poised to pick up. These impacts vary by income, but consumers at both ends of the earnings spectrum are facing challenges. Lower earners recently benefited from improved ability to save as wage gains and cost of living adjustments favored members of this group, but their spending and debt patterns may leave them more vulnerable to negative effects of inflation and interest rates this year.

Persistent price growth on household expenses looks unlikely to let up soon

Inflation has slowed, but it appears increasingly at risk of settling in at a level well above the 2% target. Top-line inflation continued slowing through February, but core inflation — which includes stickier components like services and housing — climbed higher, with last month’s gain equating to a 5.6% annualized growth rate. 

Morning Consult’s indexes tracking supply and price pressures suggest core inflation could grow at a similar pace in March. Category-specific trends contain mixed signals: Services categories continue to face wage pressures, while markets for homes and autos are caught between the upward pressure of potential pent-up demand and the downward pressure exerted by heightened price sensitivity. Despite continually elevated inflation prints, recent instability in the financial system could force the Federal Reserve to pause or slow down potential rate increases, adding to uncertainty about the trajectory of future prices.