EconoFACTS

January 28, 2022 | 09:10

U.S. Personal Spending: Bad End to a Great Year

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

As expected, U.S. consumers pulled back sharply at the end of last year, but it was still the best year since 1946. Personal spending dropped 0.6% in December and 1.0% after inflation, with firmer services demand (notably on health care) unable to compensate for a pullback in previously high-flying goods (including recreational vehicles and furniture). This was the second monthly decline in real spending following a strong start to the holiday season (0.9% in October). As well, consumers would be forgiven for taking a break after spending at a 7.9% real rate in the year, with a big push from the stimulus cheques. With retailers doing a good job of restocking store shelves late last year, supply will be somewhat less of an issue, it's hoped. However, Omicron will sting early this year, as will the loss of extra child tax benefits. In fact, consumer spending will struggle to post any growth in Q1 given the weak handoff, though it should rebound in Q2 with support from high savings.

Personal income rose a light 0.3% in December, and real disposable income sagged 0.2%, extending a long string of declines due to stubbornly high inflation. The saving rate kicked up to 7.9% from 7.2%, back above 2019 average levels.

And there was little relief on the inflation front. While overall PCE prices rose a little less than expected, 0.4%, the increase still nudged the yearly rate up to 5.8%. Core prices matched market expectations with a second straight 0.5% increase, hiking the yearly rate to a new three-decade high of 4.9%. While the six-month annualized core rate is a little lower (4.7%) than the yearly pace, the three-month figure is much higher (5.8%). Base effects will help out beginning in the spring, but we are likely to see continued pressure from rising wages and rents.

Speaking of wages, the employment cost index rose 1.0% in Q4, a little less than feared, after a 1.3% pop in Q3. The yearly rate climbed to 4.0%, a 20-year peak, and looks to grind even higher as labour shortages mount.

Bottom Line: American consumers ended the year on their back heels and will get off to a shaky start in the new year. With policy rates set to rise, the wealth effect fading, and incomes drained by high inflation, in no way will we see a repeat performance of last year. However, we still expect consumers to post an above-average performance in 2022 as they dip into their cache of savings.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics

Table 2 - United States — Employment Cost Index

(% change)

Source: BMO Economics, Haver Analytics