February 28, 2025

Personal consumption expenditures fell 0.2% in January after rising 0.8% in December and 0.5% in November.. The January decline is almost certainly attributable to the snow, ice, and extreme cold that existed in many areas of the country throughout tha0 month.  In the past year nominal spending has risen 5.6%.

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 declined 0.5% in January after rising 0.5% in December after gaining 0.4% in November.    Like the decline in nominal spending the January drop in real PCE was almost certainly attributable to bad weather.  In the past year real spending has risen 3.0%. Despite the January drop, the consumer’s willingness to spend remains solid.

Personal  income jumped 0.9% in January after having risen 0.4% in December and 0.3% in November.  In the past year personal income has risen 4.9%.  The growth in income is being fueled by growth in wages which climbed 0.4% in both November and December and have climbed 4.6% in the past year.

Real disposable income — what is left after paying taxes and adjusted for inflation — jumped 0.6% in January after having risen 0.2% in both November and December.    In the past year it has risen by 1.8%.

The savings rate jumped 1.1% in January to 4.6% after having fallen 0.3% in December and 0.2% in November.  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.  With real disposable income rising at a 1.8% pace in recent months and real spending rising 3.0% consumers should soon curtail their pace of spending somewhat.  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 2.3% 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.

GDP rose 2.3% in the fourth quarter and 2.5% in 2024.   Steady job gains and significant wage gains will provide enough fuel to keep the economy growing at a moderate rate in the months to come.  We look for GDP growth of 2.8% in 2025.

Stephen Slifer

NumberNomics

Charleston, SC