U.S. consumers cut back for second straight month

U.S. consumers cut back sharply in spending on durable goods such as autos in March, leaving overall spending unchanged for a second straight month. The slowdown in consumer activity was a major reason overall economic growth slowed so sharply over the winter.

Read: Why weak Q1 growth in U.S. shouldn’t be a surprise

Consumer spending was unchanged in March after also being flat in February and posting only a modest rise of 0.2% in January, the Commerce Department reported Monday. For the January–March quarter, the sharp slowdown in consumer spending was a key reason growth, as measured by GDP, slowed to an annual rate of just 0.7%, the poorest performance in three years.

Economists believe growth will bounce back in the current April–June period, helped by continued strong job gains, rising wages and increased consumer confidence. Many analysts are looking for a second-quarter surge to 3% or better, and they are forecasting growth for the entire year of around 2.3%, up from 1.6% GDP growth in 2016, the poorest showing in five years.

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Analysts believe the bounce back in the current quarter will be helped by continued strong job gains, rising wages and increased consumer confidence. But the poor first quarter performance underscored the challenge President Donald Trump faces in lifting economic growth, which has lagged over the nearly eight years of this economic expansion, the slowest in the post-war period.

Trump promised during the campaign to double economic growth to 4% or better through a combination of tax cuts for individuals and businesses, deregulation and tougher enforcement of America’s trade deals. But private economists contend that Trump’s growth goal will be hard to achieve given the headwinds the economy faces with an aging workforce and scant gains in recent years in productivity.

The March spending report showed that incomes grew a modest 0.2% after stronger increases of 0.3% in February and 0.4% in January. The combination of weak spending growth and stronger income growth left the saving rate at 5.9% of after-tax income in March, up from 5.7% in February.

A key inflation gauge closely watched by the Federal Reserve showed a 0.2% decline in March, while core inflation, which excludes food and energy, fell 0.1%, the first decline since September 2001. For the 12 months ending in March, core inflation has risen 1.6%, down from a 1.8% increase in February. That performance represented a small setback for the Fed’s goal of getting inflation back to annual increases of 2%.

Indeed, falling prices are the main reason for flat consumer spending in March, says Nathan Janzen, senior economist at RBC, in a daily economics update. “We continue to view the fundamental backdrop for consumer spending as solid,” he says, “supported by ongoing improvement in labour markets (including rising wages) and the stimulative stance of monetary policy.” He forecasts that consumer spending growth will bounce back to a 2.8% rate in the second quarter.

That, “along with with continued growth in business and residential investment, is consistent with a 2.9% rise in GDP after the weaker-than-expected 0.7% Q1 gain,” he says.

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Fed officials meet this week but economists are not looking for the central bank to raise interest rates at this meeting, although many economists do expect a rate hike in June.

Also read: Flat February GDP masking Canada’s momentum

Staff, with files from The Associated Press

The Associated Press is an American not-for-profit news agency headquartered in New York City.