EconoFACTS

January 27, 2023 | 09:11

U.S. Personal Spending: Bad Santa

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)

The end of the holiday shopping season was every bit as bad as preliminary reports suggested. Personal spending fell 0.2% in December after dipping 0.1% in November, and volumes were a tenth weaker in each case. Real goods spending plunged 0.9%, led by autos, and, perhaps more worrisome, real services spending was unchanged after a modest rise the prior month. The stall in services was led by a decline at restaurants/hotels that flags a pullback in discretionary spending. While part of the recent weakness reflects earlier aggressive discounts that pulled forward spending, the sharp drop-off in demand is concerning. If real spending is unchanged in the next three months, the quarterly rate would be down 1.0% annualized in Q1. Not a great starting point for the economy heading into the new year.

Personal income was also light, rising just 0.2% after a moderate 0.3% advance the prior month. Households appear to be digging less into their excess savings, as the saving rate popped one-half ppts to 3.4%... still below pre-pandemic levels but off recent historic lows.

Prices barely rose for a second straight month, with help from cheaper gasoline. This lowered the yearly headline rate by one-half ppts to 5.0%. Core prices matched expectations of a 0.3% rise, cutting the yearly core rate by three tenths to 4.4%. Importantly, the 3-month annualized rate is down to 2.9%, i.e., within shouting distance of the 2% target. The Fed will like that, and, along with the slide in spending, has all the more reason to slow the pace of tightening next week. However, core services prices excluding housing (a Powell favourite of late) also rose 0.3%, lowering its 3-month a.r. to 3.9%. It's showing less deceleration than the regular core rate, which likely means the Fed still has some wood to chop.

Bottom Line: Hammered by higher prices and borrowing costs, and feeling less wealthy, U.S. households are cutting back, and will likely contribute to a contraction in Q1 GDP. The good news is that they are also pushing back against price hikes, which will help the Fed tackle inflation and limit further rate hikes.

Table 1 - United States — Personal Income and Consumption

(month/month % change)

Source: BMO Economics, Haver Analytics