American consumers pulled back on their spending for the second month in a row in December amid a continuing economic slowdown and elevated inflation. Also contributing to the decline were weak income growth and the decreasing stock of excess savings.
Spending fell by 0.2% in dollar terms and by 0.3% after adjusting for inflation, which rose by 0.1% on the month, data from the Bureau of Economic Analysis showed on Friday.
Robust spending in the run-up to the holiday season in September and October was also likely a reason for the two-month drop in spending.
Still, consumers have grown more cautious, which will most likely result in a period of stagnated growth known as the holiday hangover.
Anticipating a downturn, consumers saved more in December as the savings rate rose to 3.4% from 2.9% previously. That put the stock of excess savings by the end of last year at $1.1 trillion, down from $1.5 trillion in the third quarter.
In a sense, this is what the Fed has been trying to do: slow down overall demand through tightened monetary policies and rate hikes.
But if spending continues to decline at this rate, the chance of a soft landing would be slim because consumer spending is the main driver of economic growth in the United States.
Inflation is falling fast, and the Fed has signaled that it will slow its rate hike campaign starting with a 25 basis-point hike next week.
We are comfortable with our base forecast of a mild recession later this year, given what we have been seeing from the data.
Inside the data
Personal income rose by 0.2% on the month following a downwardly revised 0.3% increase in November. After accounting for inflation, real income rose by only 0.1% in December.
Most spending categories dropped on the month, led by autos, apparels and furnishings, which volume fell by 2.3%, 1.7% and 1.4%, respectively.
Consumers bought more gasoline and energy goods in December as spending volume on those categories rose the most, at 1.6%, followed by transportation services with a 0.7% increase. Holiday travels certainly helped drive spending on those categories.
