The latest report from the Commerce Department shows that U.S. consumer spending remained unchanged in March, following a downwardly revised 0.1% gain in February. Economists had expected a dip of 0.1%, but the data suggests that Americans are becoming more averse to higher prices. The report also highlighted that underlying inflation pressures remained strong, raising the possibility of further interest rate hikes by the Federal Reserve next month.
Consumer spending accounts for more than two-thirds of U.S. economic activity, and the flat reading in March set consumption on a lower growth path in the second quarter. This could be due to the expiration of a temporary boost to the Supplemental Nutrition Assistance Program (SNAP) benefits, which had been authorized by Congress to cushion low-income people and families against the hardships of the COVID-19 pandemic. Researchers estimate that the end of the extra benefits resulted in roughly 32 million people getting smaller monthly SNAP payments, with a household of four receiving $600 less in food stamps each month.
The economy grew at a 1.1% pace in the first quarter, with the acceleration in consumer spending offset by businesses liquidating inventories in anticipation of weaker demand later this year. The overall pace of growth was slower than the 2.6% rate in the fourth quarter of 2022.
The U.S. economy is facing several headwinds, including higher interest rates as the Fed fights inflation, and tightening credit conditions, which could crimp both consumer and business spending. A standoff to raise the federal government's $31.4 trillion borrowing cap also poses a threat. Despite inflation remaining elevated, it is gradually slowing. The personal consumption expenditures (PCE) price index gained 0.1% in March after rising 0.3% in February, and the core PCE price index rose 0.3% after increasing 0.3% in February.
The Fed is expected to increase interest rates by another 25 basis points next week, potentially the last hike in the U.S. central bank's fastest monetary policy tightening cycle since the 1980s. The Fed has raised its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75%-5.00% range.
In conclusion, the latest report from the Commerce Department suggests that the U.S. economy is facing several challenges in the form of higher interest rates, tightening credit conditions, and a potential standoff over the borrowing cap. While inflation remains elevated, it is gradually slowing. However, the persistence of underlying inflation pressures raises the possibility of further interest rate hikes by the Federal Reserve next month. Consumers are becoming more averse to higher prices, as evidenced by the flat reading in consumer spending in March, and this could impact consumption growth in the second quarter.
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