Thursday’s personal income report will likely show moderate income growth and steady inflation while reflecting the state of the U.S. economy at the moment the country entered another Middle Eastern conflict.
Here are five things to look out for in tomorrow’s report.
Steady Core Inflation
The Federal Reserve’s preferred inflation gauge is expected to show core Personal Consumption Expenditures inflation continuing its gradual cooldown in February, even as geopolitical tensions threaten to push headline inflation higher in the months ahead.
Last week, during a speech at Harvard University, Federal Reserve Chair Jerome Powell signaled that policymakers will look past the recent energy supply shock triggered by the war with Iran when setting interest rates. Instead, the central bank will remain focused on underlying inflation trends that exclude volatile food and energy prices.
Demand Destruction
Economists expect consumer spending to show signs of strain in February, reflecting severe winter weather across much of the country. The service sector likely absorbed the largest hit, as storms disrupted travel, dining, and other activities.
If households pull back spending further in response to higher fuel and transportation costs tied to the conflict in the Middle East, the resulting demand destruction could help suppress core inflation in the months ahead and allow the Fed to issue another rate cut.
Real Income Under Pressure
Real personal income growth is expected to remain stunted, reflecting a labor market that has gradually lost momentum.
Over the past year, the U.S. economy has added fewer than 20,000 jobs per month on average. The balance between available workers and job openings has shifted noticeably over the past year, reducing upward pressure on pay. That cooling dynamic is beginning to show up in household income data, particularly after adjusting for inflation.
“We’ve got to a point where there are now more unemployed people in America than there are job vacancies,” said James Knightley, chief international economist at ING. “And that supply-demand mismatch is really helping to dampen wage growth.”
At the same time, government transfer payments are expected to account for a growing share of total personal income in February. Rising reliance on programs such as Social Security and other federal benefits suggests that more households are leaning on public support.
War Effects Not Yet Visible
Despite the intense market reaction to the conflict with Iran, the February income report will largely capture economic conditions from before the United States and Israel launched military strikes late in the month.
That timing means the data will not yet reflect the full economic fallout from disruptions in oil shipments. Although a recent ceasefire has pushed oil prices down to roughly $75 per barrel, a shipping bottleneck in the Strait of Hormuz continues to constrain supply and keep fuel costs high.
“There’s been, you know, like six weeks of inactivity in terms of ships that should be on their way,” said Tom Simons, senior economist at Money Market Jeffries. “We could see higher gasoline prices last for a little while longer.”
A Path Toward 2%
Even with those risks, economists remain cautiously optimistic that inflation will continue moving closer to the Federal Reserve’s long standing 2% target.
Several of the factors that drove inflation higher in recent years have cooled meaningfully. Rent increases have slowed from their pandemic peaks, easing core inflation.
“I remain hopeful that we will indeed get it close to 2% by the end of this year and certainly hitting 2% next year,” Knightley said.
The February report may offer early evidence that the economy is gradually settling into a lower-inflation environment even as geopolitical instability threatens to complicate the path forward.
