March 28, 2025

Personal consumption expenditures rose 0.4% in February after having fallen 0.3% in January. In the past year nominal spending has risen 5.3%

What we are really interested in is “real” or inflation-adjusted spending.  That is what goes into the GDP calculation.  After adjusting for inflation real consumption spending rose 0.1% in February after declining 0.6% in January.     In the past year real spending has risen 2.7% but real spending should be essentially unchanged  in the first quarter.

Personal  income rose 0.8% in February after climbing 0.7% in January.  In the past year personal income has climbed 4.9%.

The growth in income is being fueled largely by wages which rose 0.5% in February after having risen 0.3% in January.  In the past year wages have risen 3.8%.  Transfer payments have risen 8.5% in the past year which is further adding to income growth.  Medicare payments have risen 9.7%, Medicaid has gained 9.1%, and Social Security 6.1%.

Real disposable income — what is left after paying taxes and adjusted for inflation — rose 0.5% in February after  having risen 0.3% in January.    In the past year it has risen by 1.8%, but in the past three months it has accelerated to 3.7%.  If that continues, the pace of consumer spending will not remain sluggish for long..

The savings rate rose 0.3% in February to 4.6% after having gained 1.0% in January.  Consumers are saving less of their paycheck each month than what they have done historically.  In the 10-years prior to the 2020 recession the savings rate averaged 7.0%.  At 4.6% the savings rate is far below its historical average.  Having said that the savings rate has been significantly below the historical 7.0% mark for three years.    It appears have used credit card borrowing or some of their newfound gains in the stock market to supplement their spending.  We expect consumers to spend at a 1.7% pace throughout 2025.

A year or so ago consumers were rapidly running up their credit card bills.  But the rate of growth in credit card borrowing has slowed to about 7.0%.

Thus far the additional debt has not been a problem.  If that were the case, delinquency rates on consumer debt should have begun to rise.  They have inched higher but that is all and remain below where they were prior to the recession.

Steady job gains and significant wage growth will provide enough fuel to keep the economy growing at a moderate rate in the months to come.  We look for GDP growth of 2.0% in 2025.

Stephen Slifer

NumberNomics

Charleston, SC