Income advanced at a 0.3% pace nominally and also on an inflation-adjusted basis in November while spending increased by 0.5% as consumers engaged in a traditional jump in outlays ahead of the holiday season, according to government data released Thursday.
Income excluding government transfers increased by 0.1% as did disposable income.
While upper-end consumers were flush with cash at the end of the year and will see an increase in their disposable income because of large tax cuts that took effect on Jan. 1, one gets the sense that all is not well among those down the income scale. Wage growth in those groups has not been sufficient to support such robust spending.
On a nominal basis, compensation increased by 0.4% as did wages and salaries while the savings rate eased to 3.5% from 3.7%.
PCE inflation
The personal consumption expenditures index, the Federal Reserve’s preferred inflation gauge, advanced by 0.2% month over month in both the core and top-line indices. Both the top-line and core measures increased by 2.8% from a year ago.
Because the December consumer and producer price indexes have already been released, this data is rather stale.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
We expect a 0.4% monthly increase in the PCE index for December and a higher move to 3% annually in the core.
The increases of 0.3% in income and 0.5% in spending imply that middle-class and down-market households drew down savings and ramped up their use of credit ahead of the holidays, which is of little surprise.
Based on the November PCE data as well as the December CPI and PPI data, this recent data reinforces our view that the Fed will not be cutting rates for now.
The takeaway
U.S. consumers charged into the traditional holiday season pushing spending higher even as inflation-adjusted income and savings eased.
This suggests that one should anticipate a large traditional holiday hangover in the January spending data.
The inflation data in the report was already stale upon its release but we have enough data to estimate a 0.4% monthly jump in the Fed’s preferred metric in December and a 0.4% increase in the core rate, which translates into a 3% increase in the predictor of long-run inflation.
