Personal Income and Outlays

### Key Points

- It seems likely that the recent drop in durable goods spending is due to Trump's tariffs, which increased prices and reduced consumer spending.

- Research suggests consumption is faltering despite growing income, possibly due to economic uncertainty.

- The evidence leans toward stable inflation not driving the drop, with tariffs and consumer caution playing bigger roles.

- Durable goods spending's sharp decline in February 2025 is notable, likely linked to new tariffs on imports.

### Analysis

#### Overview

The economic data provided shows various metrics for personal consumption and income as of February 28, 2025, with a focus on short-term trends, consumption versus income, inflation, and durable goods spending. The analysis reveals a complex picture where recent policy changes, particularly tariffs, seem to be impacting consumer behavior.

#### Short-Term vs. Long-Term Trends

The monthly data indicates a significant decline in durable goods spending (-3.35%), contrasting with positive annual growth (5.26%). This suggests a recent slowdown, possibly due to seasonal factors or policy shifts like tariffs implemented in February 2025. The 3-month moving average (0.23%) being positive indicates the drop might be recent, while historical averages (average monthly 0.40%, average annual 4.70%) show consistent growth, highlighting a potential temporary dip.

#### Consumption vs. Income

Real disposable income is growing steadily (monthly +0.56%, annual +1.82%), which should support consumption. However, durable goods spending is faltering, suggesting consumers might be saving more or cautious due to price increases from tariffs or general economic uncertainty. This mismatch is unexpected, as growing income typically boosts spending, but current data shows a disconnect, possibly driven by external policy impacts.

#### Inflation

Inflation, measured by PCE excluding food and energy, shows a monthly increase of 0.28% and an annual rate of 2.65%, which is stable and within a manageable range. This stability suggests inflationary pressures are not the primary driver of the consumption drop, with tariffs and consumer caution likely playing bigger roles. Historically, average annual inflation was higher (3.24%), indicating current rates are relatively controlled.

#### Durable Goods Weakness

The sharp monthly drop in durable goods spending (-3.35%) stands out, likely linked to Trump's tariffs on imports from China (10% effective February 4, 2025), which increased prices for goods like electronics and vehicles. Consumer confidence also plunged in February 2025 due to tariff concerns, potentially amplifying the effect. This decline is unexpected given the positive income growth, highlighting policy impacts on spending behavior.