In a mixed release (due to government shutdown), the BEA reported a decline in personal income (-0.1%) in January, but following an upwardly revised 1% gain in December. Despite the income gain, personal spending fell 0.5% in December in nominal terms, and 0.6% after adjusting for inflation. This marks the worst performance since September 2009.
Special factors boosted income growth in December including a one-time dividend payment by VMware Incorporate and increased farm subsidy associated with the Department of Agriculture’s Market Facilitation Program.
Spending pulled back on all components, led by durable goods (-1.9%). Non-durables fell 1.2%, while services pulled back 0.2%.
With income up and spending falling, the personal saving rate rose to 7.6% from 6.1% in November.
Inflation in the PCE deflator decelerated to 1.7% in December (from 1.8%). Core PCE inflation remained steady at 1.9% in the month.
Key Implications
December is looking like an all-around terrible month for U.S. economic data. Some of the pullback in spending in December likely reflects undue strength in November, which may indicate a pulling forward of typical seasonal spending, distorting the read somewhat.
Not only are we looking further back in the rear view mirror than usual, but the combination of government shutdown and exceptional financial market volatility makes reading the economic tea leaves that much more difficult. That said, both of these impacts have since faded (for now), which should lead to a better reading on more recent economic data (when it is finally released).
Fundamentals for consumer spending are solid. Job growth has maintained its strong pace, and wage growth is accelerating. Consumers have an ample cushion to spend. This should lead consumer spending to improve to above 2% in the second quarter.
