Consumer expenditure in the US declines, and inflation slows
Washington, 27 Jan. Consumer spending in the United States decreased for a second consecutive month in December, placing the economy on a slower growth trajectory going into 2023. However, inflation continued to decline, giving the Federal Reserve flexibility to moderate the pace of interest rate increases next week.
The Commerce Department's data on Friday also revealed the weakest increase in personal income in eight months, which is bad news for consumer spending as a result of sluggish wage growth. Despite the fact that expenditure on commodities fell the greatest, spending on services practically stagnated.
Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, stated that U.S. families are making cuts because they are "hammered by increased prices and borrowing rates, and feeling less rich. This will undoubtedly lead to a drop in GDP in the first quarter." The good news is that they are resisting price increases as well, which will aid the Fed in combating inflation and preventing more rate increases.
More than two-thirds of American economic activity is comprised of consumer expenditure, which fell 0.2% last month. Spending decreased by 0.1% in November as opposed to increasing by 0.1% as previously reported due to lower revisions to the data. Reuters surveyed economists who predicted a 0.1% decline in consumer expenditure.
The information was contained in the advance fourth-quarter gross domestic product report, which was released on Thursday. The report revealed that consumer spending remained strong and contributed to the economy's 2.9% annualized growth rate.
The probability of a recession by the second part of the year increases because to the weak handover to 2023, but it also lessens the necessity for the U.S. central bank to maintain an excessively strong monetary policy posture.
The demand for products, which are often purchased on credit, has been lowered by higher borrowing costs. A significant decrease in goods purchases was seen in December, which was partially caused by decreasing gas prices, which reduced service station earnings.
Spending on durable manufactured products, such as cars, toys, and furniture and equipment for homes, fell by 1.9%. Spending on durable goods fell 3.0% in November. Last month, spending on nondurables like apparel and shoes fell 1.4%.
The breadth of benefits is constrained by the fact that some households, particularly those with lower incomes, have spent down savings built up during the COVID-19 epidemic, despite the fact that rise in expenditure on services is aiding in anchoring consumption.
Last month, spending on services grew by 0.5%, mirroring November's growth. Housing and utility costs, air travel, healthcare costs, and leisure costs all contributed to the support of service expenditures.
WAGE GAINS SMALL
After increasing by the same amount in November, the personal consumption expenditures (PCE) price index moved up 0.1% last month. The PCE price index rose 5.0% in the 12 months ending in December. This decrease in growth over the prior year was the weakest since September 2021 and came after a 5.5% increase in November.
After increasing by 0.2% in November, the PCE price index increased by 0.3% when the volatile food and energy components were excluded. After gaining 4.7% in November, the so-called core PCE price index increased 4.4% year over year in December, the weakest increase since October 2021.
The University of Michigan poll released on Friday showed that consumers' 12-month inflation forecasts fell to a 21-month low of 3.9% in January, underscoring the better inflation outlook.
The Federal Reserve last year increased its policy rate by 425 basis points, bringing it to a range of 4.25% to 4.50%, the highest level since late 2007. According to CME's FedWatch Tool, financial markets have already factored in a 25 basis point rate rise at the U.S. central bank's meeting on January 31–February 1.
According to Christopher Rupkey, chief economist of FWDBONDS in New York, "the economy isn't out of the woods when it comes to inflation, but monetary policymakers down in Washington are making work in moderating the worrying price rises witnessed in the first half of 2022."
After falling by 0.2% in November, consumer expenditure fell by 0.3% in December after accounting for inflation, the sharpest drop in a year.
The future for spending is uncertain as personal income increased by 0.2%, the weakest growth since April, after growing by 0.3% in November. Similar to November's growth, wages increased by 0.3%. However, there is hope that the largest cost of living adjustment since 1981, which went into effect in January and affects more than 65 million Social Security beneficiaries, will stop the decline in consumer spending.
After taking inflation into account, the income available to families grew by 0.2%.
According to Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina, "households still have around nine months of spending capacity if they continued to draw down surplus saving at the pace they have in the last six months."
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