US consumer spending ends 2022 on weaker grounds; slowing inflation

  • Consumer spending fell 0.2% in December
  • personal income increases by 0.2%; The savings rate rose to 3.4%.
  • Core PCE price index rose 0.3%; 4.4% increase year on year

WASHINGTON (Reuters) – U.S. consumer spending fell for the second straight month in December, putting the economy on a lower growth path heading into 2023, while inflation continued to ease, which could give the Federal Reserve an opportunity to slow further. the pace. Interest rate hike next week.

The report released by the Commerce Department on Friday also showed the smallest gain in personal income in eight months, partly reflecting moderate wage growth, which doesn’t bode well for consumer spending. Although the decline in spending was mostly in the goods sector, services expenditures were mainly disrupted.

“Because of rising prices and borrowing costs, and feeling less affluent, American households are falling behind, likely contributing to the GDP contraction in the first quarter,” said Sal Guattieri, chief economist at BMO Capital Markets in Toronto. “The good news is that they are resisting price hikes, which will help the Fed tackle inflation and limit interest rate hikes.”

Consumer spending, which accounts for more than two-thirds of US economic activity, fell 0.2% last month. Data for November was revised down to show spending declining by 0.1% instead of gaining 0.1% as previously reported. Economists polled by Reuters had expected consumer spending to fall 0.1 percent.

The data was included in the fourth-quarter gross domestic product report published on Thursday, which showed that consumer spending is maintaining a solid pace of growth and helping the economy expand at an annualized rate of 2.9%.

A weak delivery into 2023 raises the risk of a recession by the second half of the year, but also reduces the need for the US central bank to maintain an overly aggressive monetary policy stance. The Fed’s fastest rate hike since the 1980s has pushed the housing market into recession and manufacturing in the early stages of deflation.

High borrowing costs have undermined demand for goods, which are usually purchased on credit. In December, there was a significant drop in spending on goods, partly reflecting lower petrol prices, which reduced receipts at service stations.

Spending on long-running manufactured goods such as automobiles, recreational goods, furniture and home equipment fell 1.9%. Spending on durable goods fell 3.0% in November. Spending on non-durable goods such as clothing and shoes fell 1.4% last month.

Although growth in spending on services helps anchor consumption, some households, especially those with lower incomes, have depleted savings accumulated during the COVID-19 pandemic, limiting the scope for gains.

Spending on services increased 0.5% last month, matching November’s gain. Expenses for the services were supported by housing, utilities, air travel, and health care, as well as entertainment.

But Americans cut back on spending in restaurants and bars. This could be a result of freezing temperatures or it could indicate that consumers are cutting back on discretionary spending as recession risks mount.

Stocks on Wall Street were mostly higher. The dollar rose against a basket of currencies. US Treasury bond prices fell.

The wage gains are moderate

The personal consumption expenditures (PCE) price index rose 0.1% last month after rising by the same margin in November. In the 12 months through December, the PCE price index rose 5.0%. This was the smallest year-over-year gain since September 2021 and followed a 5.5% advance in November.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after rising 0.2% in November. The so-called core personal consumption expenditures price index rose 4.4% year-on-year in December, the smallest advance since October 2021, after increasing 4.7% in November.

The Fed tracks the PCE price indices for monetary policy. Other inflation measures also slowed significantly.

Reuters Graphics Reuters

An improving inflation picture was underlined by a University of Michigan poll on Friday that showed consumers’ 12-month inflation expectations fell to a 21-month low of 3.9% in January.

UMich inflation forecasts

The Fed raised its policy rate last year by 425 basis points from near zero to a range of 4.25%-4.50%, the highest rate since late 2007. Financial markets priced in the Fed’s 25 basis point interest rate increase in The first of January. 31-Feb. One meeting, according to CME’s FedWatch tool.

said Christopher Rupke, chief economist at FWDBONDS in New York.

Adjusted for inflation, consumer spending fell 0.3% in December, the sharpest drop in a year, after falling 0.2% in November. This puts consumer spending on a low growth footing at the start of the first quarter.

With personal income rising 0.2%, the smallest gain since April, after a 0.3% increase in November, the outlook for spending is uncertain. Wages rose 0.3%, matching the increase in November. But there is hope that the largest cost-of-living adjustment since 1981 for more than 65 million Social Security beneficiaries, which took effect in January, will curb the decline in consumer spending.

Decreased inflation also raises the purchasing power of consumers. Income at the disposal of households after accounting for inflation increased by 0.2%. The savings rate rose to a seven-month high of 3.4% from 2.9% in November, with revisions to previous data showing a more moderate pace of declining savings than previously expected.

“We estimate that households still have about nine months of purchasing power if they continue to cut down on excess savings as quickly as they have in the past six months,” said Tim Quinlan, chief economist at Wells Fargo in Charlotte, North Carolina.

(Reporting by Lucia Mutecani) Editing by Dan Burns, Jonathan Otis and Andrea Ricci

Our standards: Thomson Reuters Trust Principles.

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