U.S. consumer spending tumbles in December

U.S. consumer spending tumbled 0.5% in December, the biggest decline in nine years, as the holiday shopping season ended in disappointment. Meanwhile, incomes rose sharply in December but edged down in January.

The fall in consumer spending followed sizeable gains of 0.7% in October and 0.6% in November, the Commerce Department reported Friday. December’s result means that spending for the quarter decelerated significantly, a primary factor in the slowing of the overall economy in the final three months of the year. Gross domestic product recorded a growth rate of 2.6% after a 3.4% gain in the third quarter.

Incomes jumped 1% in December, though slipped 0.1% in January. The government didn’t release spending data for January because of delays stemming from the government shutdown.

In a report, BMO senior economist Sal Guatieri said the poor consumer spend was likely the result of “the confidence-shattering plunge in equities” in December, as well as the government shutdown.

The weak result implies a downward revision to Q1 GDP growth to 1.2% from 1.6%, he said. On the positive side, consumers are expected to recover.

“Spending should rebound nicely in coming months given the reversal in equities and confidence, and solid job and income support,” Guatieri said, noting that incomes dropped in January due to less dividend income. “Consumers will continue to drive the economic expansion at or above a potential pace for most of this year, despite the fading tax boost,” he said.

The big fall in spending reflected sizeable declines in purchases of durable goods such as autos, as well as non-durable goods such as clothing during the all-important holiday shopping season. The result shows that consumer spending, which accounts for 70% of economic growth, was showing significant weakness heading into the current quarter.

Inflation, as measured by a gauge preferred by the Federal Reserve, was up 1.7% for the past 12 months ending in December. That’s the slowest 12-month pace since a similar 12-month gain for the period ending in October 2017 and is below the Fed’s 2% target for annual price increases.

Federal Reserve Chairman Jerome Powell told Congress this week that with a number of economic risks facing the country and with inflation so low, the central bank intends to be “patient” in deciding when to change interest rates again.

The move to a prolonged pause in further rate hikes, which the Fed had announced at its January meeting, has cheered financial markets that had been worried the central bank, which hiked its benchmark rate four times last year, could move rates up too quickly, raising the risks of an economic downturn.

The spending and income report showed that the saving rate jumped to 7.6% of after-tax income in December, compared to 6.1% in November. That was the highest saving rate since January 2016, and is “a nice cushion for households to lean on,” said Guatieri.

U.S. manufacturing slows

Also released today was U.S. manufacturing, which expanded at a slower rate in February as the pace of new orders, production and employment each slipped.

The Institute for Supply Management, an association of purchasing managers, said Friday that its manufacturing index fell to 54.2 last month, down from 56.6 in January. Readings above 50 signal growth in manufacturing, and the sector has been expanding for the past 30 months.

The decline might have reflected the colder weather in February as well as the short month, rather than an outright deceleration, said Tim Fiore, chair of the ISM manufacturing business survey committee.

Adjusting for those two factors, Fiore said, “It was a stable month. Nothing wrong with a stable month.” He suggested that the index pointed to overall economic growth of roughly 2.5%.

The downside reading extended negative dollar momentum and saw yields fall slightly, said CIBC economist Katherine Judge in emailed commentary.

U.S. factories appear to have downshifted recently. The Federal Reserve’s report on industrial production found that the manufacturing sector had contracted 0.9% in January, including a sharp 8.8% drop in the output of motor vehicles and parts.

The companies surveyed for the ISM index suggested that the U.S. economy is healthy, although concerns exist about the trajectory of the global economy and any lingering impacts from the import taxes imposed by President Donald Trump.

Of the 18 industries surveyed for the report, 16 reported growth in February. Textiles, computer and electronic products, primary metals, transportation equipment and wood products were among the sectors saying that they had expanded. Only non-metallic minerals reported an outright decline.