US: Income Growth Softer, Consumption Declines in Line with Estimates

Personal income rose 0.3% m/m in December, slightly below the consensus forecast for 0.5% m/m. November growth was revised up from 0.4% m/m to 0.5% m/m. Compensation of employees (+0.6% m/m) was the primary driver of higher income, but it was partially offset by a decrease in proprietors’ income (-1.4% m/m).

Removing the effect of price changes and taxes, real personal disposable income was down 0.2% in December, while November’s decline held steady at -0.2%.

Nominal personal spending slid by 0.6% month-on-month in December, bang on with the consensus estimate. The November reading was revised down from 0.6% to 0.4% m/m

• Goods spending declined by 2.6% m/m from a downwardly revised decline of 0.2% in November (originally +0.1%). The weakness is largely attributed to a pull-back in consumption of durables goods, which declined by 4.1% m/m. Non-durables spending also contracted by 1.7% m/m .
• Services spending held up with 0.5% m/m growth in December, but the November reading was revised down to +0.7% m/m (from 0.9% m/m originally).  The gain was largely attributed to spending on health care.

In real terms, spending growth was down 1.0%, a tick stronger than market expectations (-1.1% m/m).

The PCE price deflator rose by 0.4% m/m in December, which translated into 5.8% in year-over-year (y/y) terms (as expected). Excluding food and energy, core PCE inflation was up 0.5% m/m and 4.9% y/y (vs. 4.8% expected).

The personal saving rate was higher at 7.9% in December, reflecting growing income and the pull-back in consumption.

Key Implications

Put off by rising prices and limited inventories, American households pulled back on spending in December. It is hard to pin the pullback on Omicron, as demand for high-contact services managed to stay relatively strong, offsetting some the losses in goods spending. Still, in real terms, services spending has a way to go. It ended the year 0.7% below its pre-pandemic level.

Inflation is top of mind for many, including central bankers. The Fed’s preferred measure of inflation – core PCE deflator – came in stronger than expected and well above the central bank’s 2% target. This week, Federal Reserve Chairman Jerome Powell stressed that “there is quite a bit of room to raise interest rates,” essentially committing to a rate hike at the next FOMC meeting in March. We think that three more rate hikes will follow.

In the meantime, Omicron has likely weighed on January spending. The services sector remains particularly vulnerable as the impact from weaker contact-sensitive demand is exacerbated by capacity constraints and worker absenteeism. Still, solid income growth and some $2 trillion in excess saving, make the case for a rebound in consumption growth as the virus ebbs.