US consumer spending ends 2022 on a weaker footing; slowdown in inflation

WASHINGTON, Jan 27 (Reuters) – U.S. consumer spending fell for a second straight month in December, putting the economy on a path of lower growth through 2023, while inflation continued to decline, which could give the Federal Reserve room to slow the pace further. of their interest rate hikes next week.

Friday’s Commerce Department report also showed the smallest gain in personal income in eight months, partly reflecting subdued wage growth, which doesn’t bode well for consumer spending. Although the drop in spending occurred mainly in the goods sector, outlays on services essentially stagnated.

“Hitter by higher prices and borrowing costs, and feeling less wealthy, US households are cutting back and will likely contribute to a first-quarter GDP contraction,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “The good news is that they are also rejecting price hikes, which will help the Fed address inflation and limit further 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 fell 0.1% instead of rising 0.1% as previously reported. Economists polled by Reuters had forecast consumer spending to fall 0.1%.

The data was included in the fourth-quarter advance gross domestic product report released Thursday, which showed consumer spending maintained a solid pace of growth and helped the economy expand at an annualized rate of 2.9%.

The weak pass-through to 2023 increases the risks of a recession for 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-raising cycle since the 1980s has pushed the housing market into recession, and manufacturing is in the early stages of a recession.

Higher borrowing costs have sapped demand for goods, which are typically bought on credit. In December, there was a broad drop in spending on goods, partly reflecting lower gasoline prices, which eroded revenue at service stations.

Spending on long-lived manufactured goods such as motor vehicles, recreational goods, and household furniture and equipment decreased by 1.9%. Spending on durable goods plummeted 3.0% in November. Spending on non-durable goods such as clothing and footwear fell 1.4% last month.

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

Services spending rose 0.5% last month, matching the gain in November. Service outlays were supported by housing and utilities, air travel and health care, as well as recreation.

But Americans cut spending on restaurants and bars. That could have been a result of freezing temperatures, or it could be a sign that consumers are pulling back from discretionary spending as recession risks mount.

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

MODERATE WAGE EARNINGS

The personal consumption expenditure (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 increased 5.0%. That was the smallest year-on-year gain since September 2021 and followed a 5.5% advance in November.

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

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

The improving inflation picture was underscored by Friday’s University of Michigan survey, which showed consumers’ 12-month inflation expectations fell to a 21-month low of 3.9% in January.

Last year, the Fed raised its policy rate by 425 basis points from near zero to a range of 4.25% to 4.50%, the highest since late 2007. Financial markets have priced in a rate hike of 25 basis points at the US central bank on January 1. 31-Feb. 1 meeting, according to CME’s FedWatch tool.

“The economy is not out of the woods when it comes to inflation, but monetary officials in Washington are making progress to stem worrying price increases seen in the first half of 2022,” Christopher Rupkey, chief economist at FWDBONDS, said in New York.

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

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

The decline in inflation is also raising the purchasing power of consumers. Income available to households after taking inflation into account increased by 0.2%. The savings rate rose to a seven-month high of 3.4% from 2.9% in November, and revisions to earlier data show a more moderate pace of decline in savings than previously estimated.

“We estimate that households still have about nine months of purchasing power if they continue to reduce excess savings at the pace of the last six months,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

Reporting by Lucía Mutikani; Edited by Dan Burns, Jonathan Oatis, and Andrea Ricci

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