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U.S. Consumer Spending Cools as Savings Rise

Posted by Joseph Trevisani on Feb 1, 2016 12:56:19 PM

The American consumer seems reluctant to play the savoir of the economy, choosing to save whatever income gains become available rather than buying that extra holiday present.

Personal spending was flat in December the peak month for shopping after rising a revised 0.5 percent in November, the most in six months.  Economists had forecast modest 0.1 percent increase.  The 3.2 percent annual gain in nominal spending was the smallest December increase in six years.  

Real personal spending, that is corrected for price changes, rose 0.1 percent in December, half the forecast, following November’s increase that was revised up to 0.4 percent from 0.3 percent.  The yearly gain was 2.6 percent, the same as in November and the weakest since May 2014. 

The modest increase in consumption came despite a 0.3 percent rise in personal income, higher than the 0.2 percent median forecast, and the same as in November.  Annual income saw a 4.2 percent increase, the smallest yearly addition since March.

Income gains since the end of the recession in June 2009 have averaged 3.4 percent annually, a bit more than half the 5.8 percent average in the thirty years from 1987 through 2006.

Disposable income, or the money a household has left for spending after all taxes are taken out and adjusting for inflation, increased 0.4 percent in December.  It grew 3.5 percent in 2015, the most in nine years.

Americas decided to save a higher portion of their income in December than any month in three years. The saving rate rose to 5.5 percent  from 5.3 percent in November and that came despite the nearly nonexistent return on saving accounts, money market funds and other types of short term retail investments.  

Historically the December saving rate is not far from the 30 year average of 6.2 percent that held from 1986 through 2005.  The saving rate averaged 11.2 percent from 1950 through 1980, 9.3 percent in the 1980s, 6.8 percent in the 1990s and 4.2 percent from 2000 through 2010. 

These mediocre personal spending numbers mirror the weak December retail sales report and help to explain the slippage in gross national product in the fourth quarter. The U.S. economy expanded at a 0.7 percent annualized rate in the final three months of the year down from 2.0 percent in the third quarter the and the slowest since 0.6 percent in January, February and March, which many analysts blamed on the harsh winter.  The fourth quarter of 2015 was unseasonably warm in much of the country.

Price increases were equally absent in December with the personal consumption expenditure price index (PCE) falling 0.1 percent for the month, missing the prediction that it would be unchanged, though the prior month was revised higher to a 0.1 percent gain from flat.  The annual increase for this price deflator was 0.6 percent as expected and up from 0.4 percent in November. 

The core PCE price index, excluding food and energy costs, was flat in December, slipping the 0.1 percent prediction, while November’s increase doubled to 0.2 percent.  

The yearly core PCE price index, the Federal Reserve’s chosen inflation indicator, remained at 1.4 percent, as in November, well beneath the central bank’s 2.0 percent target.

Inflation was last at the Fed's target in the five months from December 2011 through April 2012, but a good portion of that rate was due to the mathematical base effect over the prior year’s steep decline in prices.

The U.S, economy has not seen a sustained 2.0 percent inflation rate, one reflective of actual price changes, since the four years from June 2004 through September 2008. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

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