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Economic Report: Consumer spending jump in March points to strong second quarter, while core inflation keeps Fed at bay

Consumer spending rose 0.9% in March while core inflation moderated to a 1.6% annual rate, the government said Monday. Read More...
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Consumer spending picked up In March after a sluggish start to the year, government data show.

The numbers: Consumer spending surged in March, adding to the sense the economy is on strong footing, while core inflation weakened, government figures show.

Spending jumped 0.9% in March after a 0.1% gain in February. This was the largest monthly gain in almost ten years.

The closely followed core PCE inflation was flat in March, knocking the yearly rate down to 1.6% from 1.7%. This is the lowest rate since September 2017.

Personal incomes, meanwhile, increased 0.1% in March and remained on a moderate growth path.

Economists surveyed by MarketWatch had been expecting a 0.8% gain in consumer spending and a 0.4% gain in income. Economists also projected a 0.1% gain in core inflation.

What happened: The government is releasing two months data as it continues to deal with the backlog created by the partial government slowdown.

Spending surged in March after a sluggish start to the quarter, with a 0.1% gain in February and a 0.3% rise in January. Year over year, consumer spending is up 2.9%, and is the prime factor driving GDP.

Income was subdued. The slight 0.1% gain in March follows a 0.2% gain in February and a 0.1% fall in January. Year over year, personal income is up 3.8%, moderate by historical standards. Disposable income was flat in March.

The weakness in income was concentrated in proprietors’ income. Wages and salaries rose 0.4% in March after a 0.3% gain in the prior month.

As a result of the boost in spending and low income, the savings rate fell to 6.5% in March, which is the smallest since November. The savings rate has averaged 6.9% since February 2013.

Headline inflation firmed in March, rising 0.2% after a 0.1% rise in February. This pushed up the year-on-year reading to 1.5% in March from 1.3% in February.

Big picture: The pickup in spending in March adds to the sense that the economy will remain solid in the second quarter after the 3.2% growth rate in the first quarter. Spending was weak in the first three months of the year but is starting the second quarter at a strong pace.

Core inflation is slightly above the 1.5% annual rate that is considered to be the bottom of the Fed’s comfort zone.

Muted inflation is expected to keep the Fed on the sidelines at their meeting this week. Fed officials have said they will be “patient” about further moves in interest rates. The market continues to think the next move by the central bank will be an interest rate cut.

Here are the latest year-over-year inflation readings in one chart.

What they are saying: Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said growth remains too strong for a rate cut, while inflation remains too weak for a rate hike.

Market reaction: Stocks were little changed in early morning trading. The Dow Jones Industrial Average DJIA, +0.00%   fell slightly last week, the second weekly decline in the past three weeks.

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