Further evidence of robust household income and spending growth was on display inside the December U.S. personal income, spending and PCE report released on Friday.
In a separate report, the Employment Cost Index increased by 0.9% in the fourth quarter with overall compensation increasing by 3.8% and 3.6% for private sector workers. reaffirming the potent capacity of households to support spending at or above a 3% level.
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There was even progress on inflation as the Federal Reserve works to bring its preferred measure, the personal consumption expenditures index, down to its target of 2%. The three-month annualized pace stood at 2.3% while the six-month average annualized pace was 2%, in contrast with the 2.6% top-line figure.
As for the core PCE measurements, which exclude the more volatile food and energy components. the three-month annualized rate stood at 2.3% and the six-month annualized pace was 2.1%
So, slow progress is the primary takeaway in the move toward the Fed’s 2% target, and policymakers will need to see an easing in service inflation and rents to have the confidence to make another rate cut.
Friday’s data will continue to support a Federal Reserve that is in no hurry to cut rates as it faces stubborn inflation and potentially disruptive policy changes out of the Trump administration.
The 0.3% increase in the month-over-month PCE price index and a 2.6% year-ago increase play into the Fed’s current approach, while the core PCE increased by 0.2% and 2.8% from a year ago.
This data comports well with our forecast of no Fed rate hike in March; if there are any reductions at all this year, they will occur later this spring or in the second half of the year.
The data
The income and spending data was strong across the board. There were 0.4% monthly increases in personal income, compensation, wages and salaries, and disposable income.
Real income gains fueled an increase of personal spending of 0.7% on the month and 6.6% on a three-month average annualized pace.
Consumers drew down savings on the month to holiday spending as the savings rate declined from 4.1% in November to 3.8% in December.
On an inflation-adjusted basis, personal spending increased by 0.45% and was up by 4.2% on a three-month average annualized basis, which matches up with the fourth quarter gross domestic product data published on Thursday. Disposable income increased by 0.1% once adjusted for inflation.
Inside the Fed’s preferred inflation index, goods inflation was flat from a year ago, durables prices declined by 1.1% over the past year and services inflation remained sticky at 3.8% over that same period.
Excluding food and energy, inflation increased by 2.8% (or, more precisely, 2.794%), food prices increased by 1.6% and energy costs by 1.1%.
The takeaway
Robust income and spending gains continue to underscore a strong economy that is benefiting not only from real income gains but also from rising equity and home prices.
These gains have come ahead of what is expected to be pro-cyclical fiscal expansionary policy that features tax cuts and deregulation, which will support the economic expansion.
But wary central bankers see these trends, and also see an inflation rate that has yet to come down to its 2% target. Day by day, it looks increasingly likely that we may have reached the end of the road on the Fed’s rate-cutting campaign.
