Illustration: Sarah Grillo/Axios
The overall labor market is solid and real incomes are growing. But the consumer — once eager to spend — is now socking away their cash, appearing more hesitant about opening their wallets for various things.
- That's the takeaway from Friday's personal income and spending data showing that consumers, the bedrock of the U.S. economy, are becoming increasingly wary.
Why it matters: The drop-off in consumer demand bodes well for curbing inflation. But it could also be the beginning of a bigger, more worrisome slowdown that could put the economy in a rut.
By the numbers: Consumer spending fell by 0.2% in December, while November was downwardly revised to -0.1%, echoing other data that showed a sharp slowdown in shopping at the end of the year.
- One result of the spending slowdown is an upswing in the personal saving rate, after months of consumers drawing down the massive buffer of savings built up during the pandemic.
- In September, that rate fell to a rock-bottom 2.4% — the lowest recorded in over a decade. Since then, it's risen steadily, hitting 3.4% last month.
What they're saying: "Consumers are growing cautious after rapidly drawing down on their savings last year," Lydia Boussour, senior economist at EY-Parthenon, wrote in a note.
The intrigue: What's happening now is a reversal of behavior seen earlier in the year. Then, real incomes were falling (or flat) as inflation raged — an environment in which it would make sense for consumers to pull back.
- But that didn't materialize until the final months of the year, even as real disposable income grew at solid 4% rate in the fourth quarter.
- "[H]ouseholds have burned through much of their excess savings accumulated during the pandemic and the savings rate has begun to renormalize," Conrad DeQuadros, an economist at Brean Capital, wrote in a note.
The backdrop: As expected, the Fed's preferred gauge of inflation continued to cool last month.
- The core Personal Consumption Expenditures index, which excludes food and energy costs, rose at a 2.9% three-month annualized rate — dropping, but still above the Fed's 2% target.