US DATA: Feb PCE Data Points To Inflation Taking A Bite Out Of The Consumer

February's personal income/outlays report showed an unexpected (but anomalous) drop in income, but there should be relatively more concern over largely-in-line spending growth, which is showing increasing signs of stalling - especially in real terms. Solid-enough wage growth and tax relief look like they will continue to underpin consumer spending, but the sizeable bite taken out of purchasing power from rising inflation continues to weigh on PCE's contribution to real GDP.

• Personal income fell by 0.07% M/M, the first contraction since last May and surprising the consensus for 0.3% growth. But employee compensation, the bulk of income, remained decent if a little slower (+0.2% after 0.4%, with a 3-month/3-month annualized rate of 3.9% the slowest since Aug 2025). Overall though, income was dragged down by a $34.4B drop in "other" government social benefits, which was in turn the result of lower Affordable Care Act enrollments (for which households receive tax credits). The BEA also notes that personal dividend income fell $39.7B; between those two volatile/one-off categories, the $33B increase in employee compensation was more than offset.
• With taxes paid remaining negative for the year (0.0% growth in Feb, after -3.1% in Jan, reflecting the OBBB tax cut impact), disposable income fell by 0.1% (+0.9% prior) - again, the first drop since May 2025. (The savings ratio dropped to 4.0% from 4.5% prior, but this is volatile).
• But when inflation is taken into account, the figures all look increasingly weak. February saw a 0.45% M/M drop in real disposable income, the biggest since March 2022 and 3rd fall in the last 5 months, which while reflecting in part the anomalous factors mentioned above, it's barely grown since last September (and just 1.1% Y/Y, joint-slowest growth since 2022).
• In turn, while spending largely met expectations in the month - with real personal spending up 0.10% M/M, vs 0.2% expected, 0.0% prior rev from 0.1% - that's versus a 0.5% rise in nominal terms. And spending volumes are turning increasingly flat: the 3M/3M annualized pace of real spending is down to 1.1% from 1.4% for the slowest since April 2025, and compared with 3.5% in September/October last year.
• February did see the first growth in real goods consumption since November, at +0.15% (-0.7% prior rev down from -0.4%), but is still below the level of last July and the current quarterly growth rate is -2.0%, weakest since 2022 (for comparison, the retail sales Control Group category rose by 0.45% M/M in nominal terms in Feb). Services consumption was also a concern for the first time in a few months, growing just 0.08% after rising 0.3% in each of the prior 2 months, though as with January this category is holding up overall consumption, with a 2.4% quarterly growth rate (albeit down from the high 3s late last year).
• The breakdown wasn't great either: recreation services spending had its worst month since February 2025, with healthcare (+0.3%), very much a non-discretionary category, again driving overall growth.
• Looking ahead, March's retail sales look to be strong in nominal terms, but it would be unsurprising to see them come in negative in real terms.