Higher spending, not-as-high incomes. But wages and salaries keep going up. I'll take it

The always-important income and spending reports for February came out on Friday, and it showed American consumers stepped up last month, but some other things that weren't so great to see.

US February Spending, Income & Inflation: Spending up 0.8%, income 0.3% while the Fed' s primary inflation metric advanced 0.3% on the month & 2.5% from one year ago. Core PCE increased 0.3% on the month & 2.8% Y/Y.

— Joseph Brusuelas (@joebrusuelas) March 29, 2024

That's a big jump in spending, and well past the rate of inflation, which shows a nice recovery from January's inflation-adjusted decline in consumption. It gets us back in line with the upward trend that we've been in since the end of 2022.

But the strong spending and the PCE number of 0.3% wasn't something that certain Wall Streeters were looking for, as they want weaker numbers on both fronts to further encourage the Federal Reserve to cut rates from the two-decade highs they are currently at.

Fed-favored inflation gauge PCE shows prices remain untamed https://t.co/RAzTI9TbQF

— MarketWatch (@MarketWatch) March 29, 2024

Yeah, I'm not so sure about that. To begin with, the last two months of core PCE increases are listed as 0.5% and 0.3%, but it’s really only 0.45% for January and 0.26% for February, so you wonder what these experts would be saying with a tiny fraction allowing the numbers to round down to 0.4% and 0.2%. Yes, it's still a bit hot (it places the annual rate somewhere around 4.3%), but also 1% below what our Fed Funds rate is right now. And if you go out to the last 6 months and the last 12 months, our annualized PCE increase still comes in around 2.8-2.9%.

And The only real concern I’d have in this report is that the 0.8% and $145.5 billion (annualized) jump in spending was far above the 0.3% and $66.5 billion increase in incomes, leading to a sizable drop in the savings rate from 4.1% to 3.6%. But even that doesn’t seem so bad when you realize that wages and salaries went up by $92 billion last month, the best in more than a year for that category.

And then I was looking inside the numbers at the full report and saw that income growth was only restrained last month because a big jump in dividends that happened in January wasn’t repeated in February. Take out dividends and interest income, and you see that we had continued strong growth in income from all other factors (aka “the ones that most non-rich people get their funds from”).

Increase in income LESS dividends and interest income
January 2024 +0.83% (+162.9 billion)
February 2024 +0.72% (+144.1 billion)

I don’t anticipate underlying income growth to stay at a 9% annual pace for the rest of 2024 (although that would probably be awesome), but I do think it means our overall economy is still in a very good place. Yes, we need to see inflation stay around that 3% annual rate and we also need to have wage increases continue above that level. But if this holds, and especially if the Fed starts getting rates back toward the reality of a 3% inflation world, we have a good chance of continuing the good numbers we saw in 2023.