January 26, 2024
Personal consumption expenditures jumped 0.7% in December after having risen 0.4% in November. The consumer is still willing to spend despite worries about inflation and the pace of Fed tightening.
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 0.5% in both November and December In the past year real spending has risen 4.0%. The consumer’s willingness to spend has been fairly steady since the beginning of last year even though his or her purchasing power has been eroded to some extent by inflation.
Personal income rose 0.3% in December after having gained 0.4% in November. The growth in income is being fueled by growth in wages which climbed 0.4% in December after climbing 0.5% in November. Firms are under worker pressure to raise wages (given that average hourly earnings in real terms fell for two years). As a result, wages have risen 6.5% in the past year.
Real disposable income — what is left after paying taxes and adjusted for inflation — rose 0.2% in both November and December. In the past year real disposable income has risen 4.0%. In the past three months it has risen at a 2.7% pace, plenty of fuel to keep consumers spending at a moderate rate in the months ahead. Workers and unions are pushing for higher wages to regain some of the real wages lost when the inflation rate was rising so quickly. Thus, we expect wage growth to continue to grow fairly rapidly.
The savings rate fell 0.4% in December to 3.7% after having been unchanged in November. Consumers are saving much 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%. However, with real disposable income rising at a 2.7% pace in recent months should be able to continue spending at a moderate pace.
Consumers are spending, but are beginning to struggle. To maintain their pace of spending they are beginning to run up their credit card bills. That is OK for a while because they have very little debt in relation to income currently, but that is not a sustainable situation.
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. That is not yet the case.
We expect GDP to rise 1.5% in each of the first two quarters of this year. Steady job gains and significant wage gains will provide enough fuel to keep the economy going for some time to come.